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.

Remember Groupon?

I have written about Groupon several times in the past few months or so (Read here, here and here). I think it is clear by now that I am uber anti-IPOs and will remain so for a long long time. If you are still not convinced about the evilness of IPOs, here are more reasons for you:

For the first time since it went public earlier this month, Groupon broke below its offering price of $20 per share. Shares of Groupon fell 16 percent on Wednesday to close at $16.96. 

The popular daily deals site had wrestled with intense scrutiny and volatile equity markets in the weeks leading up to its offering, but its debut was widely heralded as a strong performance. On its first day of trading, Groupon rose as much as 50 percent, before settling at $26.11 per share.

Here is what the chart looks like:

Can you imagine your wealth being eroded by 16% in one day? Yeah, you can tell me that if you had subscribed to the IPO and sold off at USD26, you'd make a handsome profit. But human greed does not work like that. When the price hit USD26, you would have hoped for it to go even higher.

Buying into an IPO is like injecting heroine. It can appear to be fun while the high lasts. And when you are high, you will want more of it. That is, until the high is gone.

How do you like Groupon now?

Volume 3 Issue 44: Intelligent Investing

Groupon Is A Disaster

Can't really say I didn't see this coming. Here is an earlier post on Groupon. In short, this is what I said:

A strong profitable company will still be around 5-10 years from now. It also does not need to make up a way to measure its own profitability. In other words, let the numbers speak for themselves.

It still holds true now. Read this:

Adding to growing customer discontent, Groupon, which was initially seen by small mom-and-pop shops as a way to drum up new business, was losing favor with some of them. Merchants began to do the cruel math on the daily deals. 

Restaurants offering $50 of food for just $25 only collect $12.50 -- not even enough to cover the cost of the food. Some businesses also complain that the deals for new customers anger long-time patrons. And some say that the bargains attract high-maintenance types who don't turn into loyal customers. 

"Your restaurants are full packed with people who aren't making you any money," says Paul Evans, a Kansas City marketing executive who advises clients against using Groupon. 

Take Jessie Burke, for instance, Last year, the owner of Portland's Posies CafA(copyright) offered a $13 coupon for $6. The cafA(copyright) was deluged with customers and Burke ended up having to take $8,000 out of personal savings to cover payroll. 

"It the single worst decision I have ever made as a business owner," Burke said in a blog post that quickly went viral. 

Andres Arango, founder of natural jewelry company muichic.com, had a similar experience. He sold 80 coupons -- $35 of jewelry for $15 -- in two days. But of that $15, he only got $7.50. And he still had to dole out $35 worth of jewelry. 

As far as customers? "They never came back," Arango said.

HT: Business Insider

Volume 3 Issue 24: Intelligent Investing

More Sucky IPOs

Here is another reason why you seriously can't trust IPOs. You may make a quick buck off the first two days, but in a grand scheme of things, IPOs are hardly investment plays, whether you like it or not.

Here is an extract:

The S-1 filing shows that Groupon had 83m subscribers at the end of March and its revenues rose from a total of $713m in 2010 to $645m in the first quarter of 2011 alone.

Meanwhile, it made a loss according to Generally Accepted Accounting Principles of $390m in 2010 and $103m in the first quarter of 2011.

Do not fear, however, Groupon has worked out a way to smarten up its figures – it has devised its own measure of profitability called “adjusted consolidated segment operating income” or “adjusted CSOI”.

A strong profitable company will still be around 5-10 years from now. It also does not need to make up a way to measure its own profitability. In other words, let the numbers speak for themselves.