Counterpoint: Groupon is not a success

Earlier this year, my esteemed colleague Dan Primack argued that Groupon (GRPN), the daily deals company which is largely viewed as a failure, should not be viewed as such. It was a great contrarian argument, except that it was wrong.

Dan’s argument boiled down to the following points, which I’ll address in order:

1.) Groupon is not a failure because it has a $4.9 billion market cap, which is more than it was worth as a private company. (Its market cap has risen to $5.3 billion since his story.)

2.) Groupon is not a failure because it has steadily grown since its IPO, with plenty of cash on hand and no debt, signals of a healthy company.

3.) Groupon was a victim of high expectations, and it’s not the company’s fault when it failed to live up to them.

$5 billion company

Indeed, Groupon is worth more than it was ever valued as a private company. But barely. Groupon’s last round of private funding valued it at $4.75 billion. That was in 2010. When Dan published his story, Groupon was worth $4.9 billion. A 3% increase is not much of a return for investors in five years, especially for a high-growth startup.

What’s worse, Groupon could have been worth more. In 2010, Google (GOOG) offered to acquire the company for $6 billion. After rejecting that deal, then-CEO Andrew Mason declared, “Like, okay, we’re the best company in the world.” Today it’s clear that not many people believe Groupon is the best company in the world, or that it’s worth $6 billion.

But the real reason a $5 billion valuation does not make Groupon a success is because anyone who bought into Groupon’s growth story at IPO got burned. Groupon went public at a valuation of $13 billion, trading up to $19.5 billion on its first day. Shortly after, the stock price cratered, and it has been worth half of its IPO valuation (or less) ever since.

Even insiders got burned, since Groupon’s shares collapsed before the 90-day lock-up period was over, meaning they couldn’t sell while their stock lost more than half of its value. Any employee that exercised shares in the IPO likely owed more in taxes than their stock was worth. Anyone who bought low has yet to see much growth either. Over the last three years, Groupon’s stock has ended up relatively flat. It’s hard to call that a success.

Growth

I’m as surprised as Dan that people still spend $7.6 billion a year with Groupon. (That’s gross sales—the company’s annual revenue was $3.2 billion last year.) Groupon is growing: It grew revenue by 24% last year. Revenue is expected to grow 11% this year. But Groupon has reported a net income loss for each year it’s been public, including last year, when it lost $73 million. That’s not likely to change, because Groupon is a company that has to overcome a bad business model.

By now we know the daily deals business model is a novelty. Even Andrew Mason (who was ousted in 2013) admits the model stinks. Last month he told the Associated Press that Groupon was a “stupid, boring idea that just happened to resonate.”

Groupon’s revenue from daily deals has been relatively flat since 2011. To diversify, Groupon launched “Groupon Goods,” where it sells things like iPhones and jelly beans at a discount. This business has grown to represent the majority of Groupon’s income, but the margins are significantly smaller: 88% for daily deals versus 20% for goods.

The problem with both of Groupon’s businesses are the barriers to entry, or lack thereof. With daily deals, anyone could buy a “build your own Groupon” software package (from a company called Groupon Clone, no less) and start selling coupons with cute emails. In the height of Groupon-mania, many did just that, driving Groupon’s customer acquisition costs sky-high and forcing Groupon on an aggressive acquisition spree to take out regional competitors. At the height of the boom there were hundreds of daily deals startups. Groupon bought more than 30 of them. Now Amazon is moving in with its “Amazon Local” competitor. And Groupon Goods is already competing with Amazon (AMZN) , and every other online discounter.

To recap: flat growth in Groupon’s core business and some growth in Groupon’s low-margin business. This is why Groupon’s stock has been uninspired for the past three years. Today, 14 analysts rate Groupon as a “Hold,” and only nine rate it “Buy” or “Strong Buy.”

High Expectations

Dan believes Groupon was a victim of media hype. I disagree. While no company can fully control the media’s frenzied hype machine, Groupon poured fuel onto the fire. For example, the aforementioned “greatest company in the world” line. Others examples include appearing on the cover of Forbes with the headline “The fastest growing company ever” and a talk Mason gave on how to “get super rich.” Mason did not tamp down expectations after a report that its IPO would be worth $30 billion. Rather, he wrote detailed memo full of hype and promise about Groupon’s future during the company’s quiet period, which was leaked (some believe on purpose) and got him in trouble with the SEC.

Groupon was on such a crazy train ride that it didn’t have enough time to prove its model actually worked before going public. This is why it ran into accounting issues like not anticipating a high refund rate on big-ticket travel bookings, which caused it to restate its earnings and sent its shares into a downward spiral. Some reports note that many of Groupon’s investors and managers though it was too early for Groupon to go public.

After talk of a $30 billion IPO, Groupon’s brand is tainted so badly that it will be very difficult to recover. It doesn’t matter that Groupon is growing (modestly) or able to do $3.2 billion in annual revenue. Is Groupon a company that talented people want to work for? Is Groupon a company exciting startups want to sell themselves to? I would argue no to each.

The hype factor, which again, was fueled by the company and its investors just as much as the press, is the reason I must address Dan’s headline, which implores: guys, come on, let’s all stop laughing at Groupon. I see no reason not to think of Groupon when I need a good chuckle, if only for the following seven reasons:

1.) Mason’s cheeky resignation letter (“I was fired today. If you’re wondering why… you haven’t been paying attention”). Actually, laugh at any of Mason’s goofball antics.

2.) Mason’s business rock album, “Hardly Working,” which is funny on purpose.

3.) This memo, which trashes the financial press for being critical of Groupon’s numerous accounting errors and challenges.

4.) This time Groupon attacked a critical reporter for her “nastygram.”

5.) This time Groupon thought the Earth was 400 years old.

6.) I’m even able to laugh at the fact that, in order to access Groupon’s investor relations page, I had to sign up for its daily deals blasts again, and the first deal I got was for a yoga studio I frequent. I had no choice but to buy the coupon (it was a good deal!), thus indirectly supporting my opponent’s argument. Dan had this to say: