Groupon Investors Head for the Hills

After posting revenue growth of 45 percent from a year prior, many companies would see an increase in stock price reflecting investor confidence. However, daily deal leader Groupon posted its first-ever quarterly profit as a public company and quickly saw its shares fall to new lows.

This isn’t normally how things work — why the investor worries?

One part of the equation is that is that the numbers need a closer look. Revenue rose just 2 percent sequentially from the first quarter of this year, while second-quarter billings actually slipped 5 percent in the first three months of the year. And there’s more.

“Groupon’s difficulty in the market is in part due to the aggressive sales tactics the company used to grow so quickly,” said Josh Crandall, principal analyst for Netpop Research. “Small businesses that have tried Groupon are now evaluating the ROI of their offers to understand the long-term impacts on their businesses.”

“From what we’ve heard in the street, many businesses aren’t seeing returning customers from the deals they’ve provided,” Crandall told the E-Commerce Times. “Groupon will need to find the correct balance with the SMBs it supports, and this will take time to develop.”

Groupon did not respond to our request for further details.

In Good/Bad Company

The daily-deal company will have to deal with the fact that investors will likely be cautious, especially as Groupon finds itself in good or bad company with the likes of Facebook and Zynga, which also had high-profile IPOs in the past year and subsequently failed to meet investor expectations.

“Facebook, Zynga, and Groupon have all rushed to build the most momentum they can before leveraging the markets,” added Crandall. “From an entrepreneurial perspective, they have done what’s right for their companies.”

However, the investors may have been overly excited about these companies’ prospects, which were intensified in no small part by the media attention they received. Simply put, some investors may have expected more for their money.

It is up to Groupon — and the others — to use those funds to ensure a return on investment.

“Now, with their war chests full of public money, they must find ways to leverage their cash to create sustainable businesses in an increasingly digital world,” suggested Crandall. “It’s going to be tough, but it’s better to be sitting on a pile of cash than not going public in the first place. It may be a bubble and it may deflate for a bit, but I don’t think it’s going to pop this time around.”

Reinvention Time?

With Facebook, Zynga and now Groupon not looking so rosy to investors, it might be easy to declare this another tech bubble. Or it could just be that the companies need to actually innovate to stay relevant in their respective post-IPO era. In other words, the investors will demand more or simply get out.

“In Groupon’s case, the main problem seems to be the lack of originality in the company’s offerings and business model,” said Charles King, principal analyst for Pund-IT. “Simply put, offering deep discount coupons for products and services is anything but new, so the quick accumulation of competing coupon firms was no surprise.”

Then there is the timing of this. Gas prices are on the rise, Europe is seeing an economic downturn, and worries that the worst may be yet to come have investors running for cover.

“Groupon is being hit by European weakness, but also the fact that the overall market for daily deals is slowing,” suggested Greg Sterling of Sterling Market Intelligence. “This is paradoxical, because in a poor economy deals should stimulate demand. However, there’s a kind of deal fatigue or burnout operating among early deal buyers. The market is ‘maturing’ somewhat. Groupon needs to further diversify its model and bring new buyers into the market.”

Groupon also needs to keep the customers it has and prove it is helpful to businesses in building loyalty, something that remains very much a question mark at this point.

“Groupon has also been hurt by reports suggesting that coupons aren’t very good at inspiring repeat business and customer loyalty,” noted King. “Instead, merchants and service providers often find they are selling at a discount to one-time bargain hunters. That’s not sustainable for their businesses and also makes it unlikely that they’ll reengage with Groupon. Overall, it’s a vicious circle.”