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.

"Shares of the daily deals website have fallen some 17 percent over the past few days following reports of accounting errors at the daily deals website. Adding fuel to the fire was a report in The Wall Street Journal Tuesday that said the SEC is examining Groupon’s revision of its first set of financial results as a public company, which were released in February. The regulator’s probe is at an early stage, the Journal said, but the newspaper noted that it follows two other revisions to Groupon’s finances made before its debut as a public company last fall. These earnings problems are leading experts to question the reliability of the daily coupon site’s financial reporting, and even its long-term viability as a public company.

Groupon makes money by sending e-mails to subscribers about potential deals at retailers that it offers at a discount. A $40 meal at a restaurant, for example, maybe offered at $20. Groupon makes money by keeping approximately half the money the customer pays for the coupon, so the $40 meal could be purchased by the consumer for $20, and the restaurant and Groupon would receive $10 each.  Groupon pays companies up front and gets paid back over period of a year or so. The problem for Groupon is some of those companies are taking the money up front and then going out of business, leaving Groupon with the cost of paying a refund. Refund activity at Groupon has risen as it has expanded into higher-priced deals, for more expensive restaurant meals or even Lasik eye surgery. While the move expands the potential market for Groupon deals, it also increases the cost of refunds. “Groupon’s problem is similar to the subprime lending problem,” he said. “Groupon is saying we will give a restaurant cash now, but it doesn’t have to deliver a product. The businesses that sign up for Groupon are desperate, and when they go out of business, Groupon has to pay a refund.” Agrawal estimates that there are currently between $500 million and $750 million worth of outstanding Groupons.  “Like during the subprime mortgage crisis, there’s no way of tracking them,” he said. “It’s as if Groupon is holding on to a portfolio of subprime loans,” Agrawal continued. “It’s holding on to a pile of risk without knowing the height of the risk it has. The only good thing is, unlike the mortgage crisis, Groupon is not large enough to have any systemic effects on the economy.” Agrawal says Groupon could see, in a worst case scenario, major credit card companies refuse to do business with it because they see potential liabilities for their businesses.
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!