The Groupon IPO, Look For The Moat

JUNE 20, 2011 BY ERIC RICE LEAVE A COMMENT

For every moat there is a castle, at least that’s what Warren Buffet thinks. Buffet, says that any business worthinvesting in must have a moat, a huge competition barrier that completely separates that business from any other in the same sector.

Think about what he is saying, where there is a moat you will have a castle. However, for every castle there may not be a moat. Not all things are as they seem. Look for the moat, the sure bet. Other than the moat and the castle, everything else in the kingdom is irrelevant as an investor.

Let’s jump right into it:

They flat out rejected a $6 billion cash offer from Google. This is kind of like rejecting an offer from Vito Corleon, not a good idea in the long run.
They have seen growth in 5 straight quarters. Yet they did an original IPO valuation at $15 billion based on a $713 million dollar year. Remember what P/E stands for, Price vs EARNINGS.
Then they came out and re-valuated at $25 billion. What? Red Flag for me.
They have a great idea, a huge data base and they are the biggest current influencer in the space.

But do they have a moat? I don’t think so, but I know that this is not a normal “technology” play, this is a database and marketing and market share play. With $25 billion to blow on marketing in a space of startups, they would own the space for life. If you had to define a moat, this would be it for Groupon, but here are some problems:

Too Many Copycats

Groupon copycats are only outnumbered by those that have tried to become “The Next Facebook”. Since they have no real protection for their software, the world has figured out how to create deal of the day offers too. This always means 2 things for the industry in which it occurs.

First, the prices of goods and services will always get cheaper, good for us. Then, the margins will fall as dealmakers toss around discounts to acquire new business or retain a client, good for local merchants. Nowhere in this pattern do you see that this is good for Groupon. Social Media and the internet are all about value. It’s about how much value you provide to your end users. Unfortunately, Groupon doesn’t offer a lot of it moving forward. In my opinion, they have already offered all the value they ever will.

They were a great idea in a bad economy, that’s it. The coming plague of margin decay will put a toll on everyone in the space, it is only natural. They did their job and stimulated the local restaurants and massage parlors, but it is a new day. If the economy truly turns, will they be relevant?

Lack of Organic Traffic

Last year Groupon did $713 million in revenue, but they had to spend $243 million in marketing to make that happen. This is not what you want to look for when thinking of buying a stock in the social media market. As a matter of fact, you want the exact opposite. Organic traffic is all that matters in this space, period. Anything else can be duplicated, because there is no moat.

Ask yourself these questions and form your own opinion.

How much time have you ever spent on Groupon.com?
How much value do they bring your life?
How long have you been registered with Groupon?

Gray Area

Basically Groupon is a 2 year old business. They have crushed traffic and grown like weeds. So why is there so much gray area with them? They are one of the best marketing companies, ever, but they are not as sticky as LinkedIn orZynga and certainly not “social” like the LinkedIn. The questions about organic traffic moving forward have been popping up.

They have gone on air and said that their average user stays with them for 4.5 years. 4.5 years……..they have only been live for 2 years, that one is stuck in my head. Don’t let the BS cloud your thoughts. Look them up online, do your own homework on this, I hate conspiracy theories. Just note, there is some gray area in the air.

Sum It Up

Basically, Groupon is a cool system and one of the best stories in US business history, but they are nowhere near the best deal this year yet to come. They are duplicatable (in operation, not success), they were the first to the space, they have been promoting the hell out of there valuation and they will make traders some money. I am not saying stay away from Groupon at all. I am saying be prepared for what is to come should you become an investor. I personally would be more excited to see Yelp go public, but time will tell.