Tuesday, April 3, 2012
Groupon foreshadows Dot Com meltdown Part 2?
Groupon is poised to take down the dot-com bubble.
There is no "there" there, it seems. But what the real danger to Groupon is not that it was a stupid fad, but that they paid the suppliers up front and then expected to get paid back later on. Many of their suppliers are restaurants and companies teetering on the brink of bankruptcy, and looked to Groupon as a lifeline of cash. They went bankrupt anyway, leave angry Groupon holders with no business to patronize, demanding full refunds.
Pretty moronic business model, no? Paying people before they honor the coupon?
What is scary about all of this, is that few people in the media, and I assume most investors, had no idea that the company was structured this way. In retrospect, it is clear why all these companies were chomping at the bit to offer "Groupon" deals - they were all on the verge of bankruptcy. And now that the economy is improving, what company would offer such bargains - and pay Groupon half of what little money they received?
Again, IPOs are for one thing, and one thing only - to allow insiders to cash out, using your money. And sadly, once Groupon goes belly up (in record time, perhaps beating Pets.com's record of 268 days!) it could cause a major panic in the markets this summer. Ouch.
So, how does this play out in the market? Well, Groupon's problems come just at a time when Facebook is trying to go public, and other "dot com" stocks are soaring.
I really hope you didn't buy any of these stocks. I really hope my fund manager didn't either!
UPDATE 2017: Groupon is still around, its stock trading at about $3.70 a share, down from over $20. It's founder wrote the world-famous "fuck you I quit" letter, laughing all the way to the bank with the money from the idiots who bought stock in this nightmare. It has yet to earn a profit or pay a dividend, and looks like it never will. It seems irrelevant today, but when the IPO was offered, it was all the financial pages and programs talked about. Remember that the next time some IPO comes out and everyone says, "this is the next big thing!"
And no, selling coupons on the Internet is NOT TECH!