Hi,

With the Olympics starting again, I’m pulling out the analysis I did for the 2010 Winter Games. While the U.S. or China may win lots of medals, that’s in part due to the fact that we have lots of population and are rich enough so people can train. Check out the sidebar for the summary and I’ll update this after the games in London have ended.

Best regards,

David

As of 7/24, GRPN has a market cap of $4.7B. So if we look over the period from December 2010 when Google offered $6.6B, Groupon has returned (19%) in IRR as it has fallen nearly 30%. From the real excitement of people quoting $30B valuations in Q1 11, GRPN is down nearly 85%, and it’s down over 70% from the IPO price last November.

What is driving this? First, there are new business model concerns. Once upon a time when you bought a Groupon for $10 that gave you $20 at a restaurant, that money was spent. Groupon paid the merchants over a fixed schedule and thus had negative working capital. Now, however, Groupon has branched out into more expensive deals for travel and medical procedures. In more cases now, refunds are allowed. This is where Groupon got into trouble with its Q4 2011 reporting. Auditors found that Groupon had under-estimated the reserves required for refunds and thus overstated earnings. The impact was to neatly swing from making $15M to losing $15M. Given Groupon’s past accounting woes with showing gross vs. net revenues and using a non-standard profit measure (remember ACSOI?), it’s starting to remind me of an old Dilbert cartoon.

A second business model concern is more fundamental. One analyst wrote:

Well, for starters, it’s not a coupon company nor a marketing company. At its core, Groupon’s U.S. business is a receivables factoring business…. They give loans to small businesses at a very steep rate (the price of the discount plus Groupon’s commission)….. Groupon is essentially a sub-prime lender that does zero risk assessment. And as word continues to spread about what a terrible deal running a Groupon is for many categories of businesses, the ones that will choose to run Groupons are the ones that are the most desperate. For U.S. based businesses, the only time I can definitely recommend running a Groupon is if it is otherwise going to go out of business.

This is a fundamentally different description of Groupon’s business. As described here, a business desperate for cash flow runs a Groupon deal. Instead of collecting their normal $20 on a service, they collect $5 (the deal sells for $10, and Groupon keeps half). Yes, some customers won’t use the coupon, but it’s hard to make money on ¼ of the revenue. As Groupon hasn’t demonstrated that they create repeat customers or that it’s likely businesses can upsell customers, marginal businesses are collecting money upfront and building a large liability. If these companies fail, will customers expect refunds from Groupon?

On the other hand, Yipit reports that more of Groupon’s business is coming from repeat merchants. If that’s true, it’s a good sign for sustainability.

However, as predicted, competition has heated up. We’ve long held that Groupon has no sustainable competitive advantage, and now the sector has moved past the hundreds of copycat and niche sites and now the daily deals space has attracted major players. Google Offers is steadily rolling out.

Amazon is hitting the space hard. In addition to their partnership with Living Social, Amazon has its own daily deals. They’ve even added daily deals to the Woot.com site, now owned by Amazon. I expect we’ll see a rapid tapering of subscriber growth for Groupon and eventually margin reduction as the industry players compete for business deal providers.

Overall, there aren’t a lot of happy investors when your stock chart looks like this: