Do Not Buy Groupon

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

Do not buy GrouponGroupon 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┬árecently 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.

No Profitability

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.

Slowing Growth

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.

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8 Responses to “Do Not Buy Groupon”

  1. I have to agree with you 100% on Groupon. The economics of the business model do not make sense. There is so much that can go wrong.

  2. These are excellent points. I highly agree with you. Groupon should have sold….but who knows? They may surprise us and become a force to be reckoned with.

  3. I must say that buying in an IPO is a risky proposition and I wouldn’t recommend it unless you are willing to take a “flyer.” Not enough historical data to make a good valuation.

  4. avatar Eric says:

    You are totally right on this one. Buying Groupon would be kind of like buying stock in Ty (the company that made Beanie Babies) when they were at their peak. Sure it was popular, but anyone can make a stuffed animal. With so many competitors, the Groupon trend might not live forever.

  5. avatar Neo says:

    I totally agree with you on LinkedIn, I think that stock is way overvalued! I also do not like that they are already issuing a second round of public equity and diluting investors that just walked in the door a few months ago. They are also sitting on a ton of cash and of course have no real earnings or even EBITDA to speak of. Their business model reminds me of 1997 when it was all about subscribers. That’s great if you have very low operating costs, but somehow LinkedIn has over 1,300 employees! That is a lot of months to feed.
    Here is the link recent analysis post I did on this company after the secondary offering was announced:

  6. avatar LaTisha says:

    It looks like Google is already setting up shop in the social area. All they need is a few well placed ads or social sponsored stories on their search monster and their G+ users will see and buy. Groupon is not protected at all.

  7. avatar Kelsey says:

    Hi Mark,

    Thanks for the great stock investment tips! I’m a beginner investor, and while I love Groupon, now I know it’s not the best investment decision.

    What types of stocks would make good (safe) investments for a beginner? I know the stock market is volatile, but are there certain industry stocks that are less volatile than others?

  8. I would like to comment about groupon’ new issues are almost always bad investments the vast majority of these stocks are way over priced on purpose. I always recommend that investors stay away from these stocks

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