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Why Groupon Is About to Expire: Pro

Richard Saintvilus|Contributor
Wednesday, 11 Jul 2012 | 2:01 PM ET
Groupon
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Groupon

As we are now approaching the peak periods of vacation season, I have begun to look at my investment portfolio for inspiration. While that can mean a lot of things — not the least of which involves narrowing down my list of affordable destinations — in the process of searching for some possible deals I was drawn to the idea of using Groupon.

I mean why not? My wife swears by it. In fact, for Father’s Day she surprised me with a local auto-detailing voucher. The service came to my home to clean my vehicle and did a phenomenal job! When it was all done, my car looked brand new. The detailer asked if I would recommend them to a family and friend and I said absolutely. However, I wouldn’t dare recommend Groupon’s stock — at least not to friend.

Groupon’s stock has been in a freefall ever since reaching its six-month high in February of $25.84. Since then, it has lost 67 percent after closing on Tuesday at a price of $8.31, and traded below $8 a share for the first time Wednesday — with no meaningful signs of slowing down. It seems that investors are beginning to realize that while Groupon is indeed a nice concept, it’s just not a sustainable business.

As it seems to be making a news 52-week low in each session, the only question is, how much time does it have left? Will it make it to another year?

As with Facebook before it, Groupon really had no discernible business to suggest that it was worthy of its valuation — yet it nonetheless reached as high as $31 a share.

The company provides a way for users to purchase deeply discounted vouchers for use at local businesses such as restaurants and salons, and in my case auto detail and even vacations. It seems that this was enough to get investors excited about its IPO prospects. But clearly it was a mistake.

Expiring Coupon

The company first opened for trading on Nov. 4 at $20, reached its all-time high of $31.14 and closed its first session respectably at $26.11. Then immediately it seems panic set in as the stock quickly dropped to the low teens of $14.85 only a few weeks later. It seems investors had some doubts then.

What the market quickly realized is that not only are the company’s chances of earning a profit more in doubt, but competition is exceptionally fierce among existing titans such as Google, Amazon.com, and the aforementioned Facebook, as well as a rejuvenated Yahoo.

The chief concern among investors today is that it would take little to no investment at all from any of these names to launch a competing product to squash Groupon’s chances of survival. As with Facebook, its business model was relatively new, but investors placed more value on the idea rather than the execution.

Furthermore, Groupon continues to deal with a large percentage of disgruntled clients that have gotten unhappy with their deals and demanding refunds.

Bottom Line

For this reason, I believe it would be a huge surprise if there is not a bankruptcy filing by this time next year from Groupon. Moreover, I don’t see it becoming an acquisition target either, because, as noted, not only does it lack any competitive advantage but it’s extremely low profit margin all but assures a path towards obscurity. Not to mention it would cost nothing to recreate (from scratch) what Groupon currently has.

CNBC has reached out to Groupon for comment.

On that note, a couple of years ago Google reportedly put up a bid to buy Groupon for $6 billion dollars — the company turned it down. Do you think they are regretting this decision today?

—By TheStreet.com Contributor Richard Saintvilus

Additional News: Groupon Chairman Leaves for Venture Firm

Additional Views: Groupon More Appealing Now Than Before: Analyst

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Disclosures:

TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. At the time of publication, Richard Saintvilus was long Apple.

Disclaimer

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