The Wall Street Journal ran an article July 7 that brings into full view some of the flaws in RetailMeNot’s (SALE) business model. The online coupon business garners 65% of its traffic from search, making it overly dependent on Google’s (GOOG) algorithm, which changed slightly on May 20, sending SALE stock down 18% over the next three days.
While Google’s algorithm is cause for concern, RetailMeNot has other equally serious problems which the Journal makes abundantly clear.
Is it enough to suggest investors dump SALE stock, which today sits barely above its IPO price of $21, despite reaching as high as $48 in early February? And if so, should investors be moving their money into Groupon (GRPN) or some other coupon-related stock instead?
Based on the numbers, you’re probably better off avoiding the whole thing altogether.
RetailMeNot and Google
Searchmetrics analysis suggests RetailMeNot saw its visibility decline by 33% as a result of the latest tweak by GOOG. But it wasn’t the only one. Ebay (EBAY) and IAC Interactive (IACI) are just two of many that saw their visibility drop considerably. However, SALE stock was the only one to experience double-digit declines in its stock price.
The company itself downplayed the matter, suggesting algorithm changes have occurred periodically since it got into the digital coupon market in 2009. Traffic will fluctuate as a result of those changes. It feels it’s too early to assess the impact of Google’s move, and besides, 35% of its traffic is from sources other than search. Nothing to worry about, right?
I worked briefly (for six months) in 2007 for Geosign, an Ontario-based media company that raised $160 million from American Capital (ACAS), to expand its business, which included a keyword arbitrage adplacement service. The only problem: Google figured out that Geosign was gaming its page-ranking system (and making loads of money in the process) and so it specifically changed the algorithm to shut down businesses operating at the fringes. Geosign closed up shop and with it went 230 jobs … including my own.
I’m not suggesting that the latest update was specifically a smack down against firms like RetailMeNot but given Google competes directly with it and other firms such as Expedia (EXPE), Priceline (PCLN) and EBAY, James Brumley was correct to assume it’s not a coincidence. With Google controlling two-thirds of the search engine market in the U.S., it’s a big kick in the gut for SALE.
But that isn’t the only thing holding back SALE stock…