Groupon: A Train Wreck in Public Sight (Update 1)
The Chicago-based online commerce company reported fourth quarter results yesterday that were much worse than Wall Street expected, with the company in the midst of a business model pivot. Groupon is moving from the once-lucrative model of daily deals into more direct e-commerce sales, bringing it into competition with powerhouses Amazon (AMZN) and, to a lesser extent, eBay (EBAY) .
So far, the shift in model looks like a train wreck, with Groupon's operating and free cash flows plunging year over year. Operating cash flows fell 61% year-over-year to $65.7 million, compared to $169.7 million in the fourth quarter of 2011. The decline in free cash flow was even worse, plunging 83% year-over-year to $25.7 million. Despite the sharp drops, Groupon still had $1.2 billion in net cash and cash equivalents at the end of 2012.
Wells Fargo analyst Jason Maynard is a Groupon skeptic. "
Daily deals once excited Wall Street because of their high margins, but low barriers to entry invited a raft of competition from related businesses, which forced a re-rating of Groupon and the industry as a whole. Consumer reviews site Yelp (YELP) and restaurant reservation service Open Table (OPEN) were among those who jumped in, most to little success. The effect on valuations has already forced Amazon to take a write down on its investment in Groupon rival Living Social .
Mason, 33, has been at the helm of Groupon since founding the company in 2008, but with the company in transition he may no longer be the right man for the job.
Hudson Square Research analyst Dan Ernst suggested a change by the board away from Mason could be positive for the company. "Our view might be more negative except that A) it appears the new COO has near term plans to significantly cut costs overseas, and B) the magnitude of current issues could prompt the board to make changes, that would likely serve as a positive catalyst for the stock."
It's a long way from the $6 billion price Google (GOOG) was reportedly willing to pay for Groupon at the height of its popularity.
A good portion of Groupon's fallacies are a direct result of the company itself, noted Piper Jaffray analyst Gene Munster. "Since IPO, the Groupon story has largely been a comedy of errors, drawing into question the viability of the daily deal space," Munster wrote in the note. "Our belief is that while the company has done a poor job of articulating fluctuations in the business model, operating in daily deals and the broader local space is a viable business."