Last week, I wrote about a number of stocks that I felt were overvalued based on their share prices. I did not feel that the stocks mentioned were all bad companies but that the multiples were simply too high. Since that time one of the stocks (LinkedIn) has come tumbling down. LinkedIn has dropped from $80 a share to the $67 range. I do not think that this is the end of the selling as it appears that early investors have been selling off their positions. LinkedIn’s situation is eerily similar to that of the recently launched IPO of Groupon (GRPN).
Why I Am Not Buying Groupon
Groupon is the deal of the day website that offers online savings to consumers on products and services. Groupon is the dominant company in the couponing market with its 54% market share. The company’s current chief competitors are companies like Living Social and Woot.com. Living Social is the number two competitor with its 22% market share. Groupon recently went public two weeks ago in an IPO that had been heavily anticipated. While a number of investors have poured into the stock, I have avoided the fray for a number of reasons.
No Economic Moat
This a company that has no economic moat whatsoever. There is nothing to stop a young upstart business or established company from completely eliminating Groupon. Google, Facebook, Twitter, or any social media company that wanted to compete in the space could steal customers from Groupon relatively easily. Google made a $6 billion dollar offer for Groupon a year ago and it was rejected. The search engine king will likely launch its own coupon site or acquire a Groupon competitor. If a company like Google enters the couponing business, they would become a formidable competitor overnight.
Groupon has an incredibly high market cap for a company that is still losing cash. Investors are buying into the hype of what the stock could be. I am never willing to invest long term in a company that has not yet earned a profit. It is impossible to come up with a valuation for a company with no profit. Some analysts are estimating that the company will earn 85 cents to $1 a share in the next year or two. Other analysts are predicting that the company will continue losing money for the next year or two. I prefer to see a year or two of earnings and cash flows before plunking down money.
The sole reason that investors buy stocks like Groupon is the growth. Investors are attracted to growth and will chase it at any price. (SEE NETFLIX). Quarterly growth was down to 9% last quarter which shows that growth is decelerating. The company’s growth is heavily tied to its operating expenses. If Groupon wants to continue its high flying growth than the company will have to spend a lot of money on advertising and marketing. Conversely, growth will slow if Groupon continues to cut operating expenses. The companies business model is cash intensive. Groupon has to decide between more customers or more profits.
Traders could make some money trading in and out of the stock over the next few months but long term investors should sit this one out. Groupon needs to prove that the company’s business model is sustainable and that its fundamentals justify its loft valuation.