Is Groupon dying?

Groupon, which describes itself as “deal-of-the-day” website, has seen its shares tumble from $20, when it listed on the Nasdaq at the end of 2011, to $7.84 at close on the US exchange on Wednesday (12 July).

The question is, why?

Analysts point to mass competition in the online coupon market along with rising costs, while co-founder Eric Lefkofsky revealed earlier this week that he’s shifting his focus towards Lightbank, his venture capital firm, moving away from day-to-day operations at Groupon.

On Tuesday (10 July 2012), Groupon, which launched its business in November 2008 and already serves 48 countries, lost 5.46% on the Nasdaq taking its market value to a touch over $5.3 billion, having started with a valuation approaching $12.5 billion.

On Wednesday (11 July 2012), Groupon’s woes continued by following a similar decline, dropping 5.66% on the Nasdaq to $7.84.

In May, Groupon reported $559.3 million in revenue for the first quarter of 2012 with operating income up to $39.6 million, which included an expense of $28 million related to non-cash stock-based transaction. This compared to a prior loss from operations of $117.1 million in the first quarter 2011, which included stock-based expense of $18.9 million.

At its peak in 2010, several rumours surfaced regarding a takeover of the company, first by Yahoo!, and then Google for in excess of $3 billion.

World Wide Worx CEO and tech industry analyst, Arthur Goldstuck believes that the implosion of Groupon as a stock is not a surprise. Rather, the biggest surprise is that it was allowed to go as high as it did, he says. Analysts had expected Groupon to list at closer to $16 in 2011, still some way off its current share price.

“There are fundamental issues with the group-buying model, of which the most notable – from a financial performance point of view – is that there is a vast gulf between revenues and profits. The problem here is that it is really a voucher business and the vouchers themselves are already deeply discounted against original price,” Goldstuck opined.

He says the model thus enters the supply chain squeezing margins as a core element of the service. “Out of these squeezed margins, the Groupons and their ilk have to generate their own margins. It is therefore a mild form of investor insanity to confuse revenues from group-buying with money being made in the industry,” the analyst argues.

“If we were really honest about it, we’d admit that the group buying model is to ensure all players make as little money as possible. That’s a great service for consumers, and a group buying company that reaches scale, like Groupon, can make decent money. But it doesn’t leave much on the table for investors. In South Africa, it appears, only Groupon and Wicount have reached that kind of scale.

“The point to bear in mind is that these can be great businessess, but that’s not the same as great stock market shares,”  Goldstuck said.

What is interesting, In April 2012, nearly 30% of North American transactions were completed on mobile devices, compared with 25% in December 2011, Groupon said.

And as of March, the group surpassed the 35 million active customer mark, ending the quarter with 36.9 million active customers, an increase of 140% year-over-year.

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Is Groupon dying?