Even the emperor is noticing something’s missing when he looks in the mirror.
Last week, Groupon (NASDAQ:GRPN) CEO Andrew Mason acknowledged to his board of directors that it’s possible he might not be the best man for the job. The certainly uncomfortable meeting on Thursday preceded news that competing e-coupon site LivingSocial will be laying off 400 people … mostly salespeople, and mostly U.S. workers.
Privately owned LivingSocial didn’t detail why it was shrinking its work force by 9%, but there are some indirect clues to its demise. One of them is yet another big loss in Q3; the 10% dip in last quarter’s revenue didn’t help either. Throw in the fact that Amazon (NASDAQ:AMZN) wrote off nearly its entire $175 million investment in the Internet couponing property, and a grim picture surfaces.
So Groupon is whipping LivingSocial into submission? Eh … not quite.
Though kudos are due to Groupon for posting a profit (its first ever) a couple of quarters ago, its earnings growth rate is slowing, from 89% growth in Q1 2012 to 45% growth in Q2 to only 32% growth in Q3. Not that the numbers are bad, but the slowing trend is alarming, especially considering how so many competing daily-deals sites are dropping out of the game; more than 800 daily-deals sites closed shop last year. The fact that Groupon shed 954 workers of its own in the third quarter doesn’t exactly scream business is booming either.
Worse, the pace of growth is expected to slow even further as the e-coupon market saturates, as consumers lose interest in the concept, and more than anything, as Groupon’s merchant customers figure out that e-coupon campaigns don’t actually build a business — they just cost a lot.
It’s a far cry from some of the accolades Groupon and a decent number of its peers were buried in over the course of 2010. Forbes articulated that it was the fastest-growing company ever, which at the time was true. A BusinessInsider commentary offered “We’re still very bullish on Groupon and think its valuation was justified at whatever end of the spectrum its financials are, given the market and the brand.” Russian investment firm Digital Sky Technologies said Groupon was right to reject the $6 billion Google (NASDAQ:GOOG) had made for the company that year. And investors were buzzing about the new daily-deals site for months on end.
Then reality struck.
Since the stock’s IPO in November of last year, GRPN has lost 85% of its value, clearly falling well short of expectations that had been brewed up until that point. What happened?
A Textbook Case of Drinking the Kool-Aid
Few would deny that Groupon has been a disaster since going public, but going public had nothing to do with the company becoming a disaster — that was just stunningly unlucky timing.
No, the reason Groupon looks, feels and acts like a disaster is the size of the turnaround in the market’s opinion of the company.
It’s a sequence of events we’ve seen time and time again:
- A new idea gets a little traction.
- Investors’ eyes get bigger than their brains.
- Lots of money is doled out without a second thought.
- Only after the fact does anybody care to crunch the numbers or question the longevity of the business model.
That’s how the dot-com era of the late ’90s turned into the dot-bomb era of the early 2000s. That’s how Enron rose up like Icarus to be a hero in early 2001 only to disintegrate later that year. That’s how the LIBOR scandal materialized between 2007 and 2009, only to dematerialize this year.
To be fair, unlike the LIBOR and Enron fiascoes, Groupon’s meltdown wasn’t a dishonest one. It was just based on an amazingly bold assumption, most akin to the technology implosion in the early 2000s. Companies said they could make a ton of money in the future based on how certain they were about consumer spending habits. Investment analysts agreed with those claims. Individual investors believed analysts as well as believed those companies.
Guess what? The companies were wrong. The analysts were wrong. Ergo, individual investors were wrong, too … and paid the price for it with real money.
Dreams of big gains and easy money can do funny things to investors’ ears and eyes, turning off the sensors that would otherwise steer a person clear of danger. In other words, if it sounds too good to be true, it probably isn’t.
Unfortunately, it’s a lesson most investors have to learn several times in their life.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.