Tuesday, April 03, 2012

Volume 4 Issue 13: Intelligent Investing

The Disaster At Groupon

Since the middle of last year, I have harped on why Groupon was a sucky company and it was a sure-fire recipe for disaster. This was what the Groupon chart looked like in November 2011:

After yesterday's close, Groupon was at USD15.28, which was 41.2% off its post-IPO peak of USD26. Just imagine, in the short span of four months, an IPO subscriber of Groupon who did not sell off at USD26 would now by 41.2% poorer. In annualized terms, that is a plunge of 83.8%. And I have said time and again, which I simply can't stress enough, the arithmetic of investing is cruel. To break even at this point, from the lowly price of USD15.28, the "investor" would now have to gain 70.2%.

From a market-timing perspective, the S&P500 is very close to its all-time high. This means that there is no way that a market rally is going to carry Groupon back to its pre-crash price. Given all the hanky-panky that is going on (more here), I seriously doubt even a miracle can help them.

The Groupon model wasn't very sustainable to begin with. Out of all the companies that use Groupon to promote their products, only a handful have sustainable businesses due to high product quality. The others are probably failing businesses which have resorted to discount pricing as a last resort to save their business. They simply did not have the quality or the delivery system to survive and customers who use their products generally do not return without the discounts provided by Groupon.

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