Looking to buy Apple Stock but just don’t know when? Here is my technical analysis outlining factors illustrating good entry points.
Much has to be said about the viability of Groupon’s (GRPN) business model. Commentators across the board have accurately identified significant obstacles to Groupon’s continued growth and aspirations of becoming a profitable enterprise. From low barriers to competition to questionable accounting tactics, Groupon certainly has its fair share of naysayers. However, the biggest threat to Groupon’s future may be its own source of income – the merchant.
In a nutshell, Groupon’s business model focuses on monetizing the personal information of potential consumers across a broad spectrum of markets. It utilizes the email addresses of its subscribers as a communicative channel to advertise the discounted deals of local merchants (it also uses a mobile application as part of its marketing strategy). It is this direct and personalized communication to the masses that attracts Groupon to merchants. Merchants, in particular small businesses who have just started their operation or seek to broaden their customer base, see Groupon as a viable alternative to traditional advertising despite the hefty cost that comes along with it (merchants often split the gross revenues with Groupon).
Simply put, merchants are the lifeblood of Groupon’s business model. They produce the product that Groupon markets. Acquiring more merchants diversifies the list of products they can market, which allows them to attract more paying subscribers and increase revenues. As a result, the rate at which Groupon adds new featured merchants can be a quite the barometer for future subscriber and revenue growth. However, what is more important than the acquisition of featured merchants is the retention thereof. Groupon boasts of increasing the number of merchants featured in its marketplace from 212 in the second quarter of 2009 to 78,466 in the second quarter of 2011. However, this acquisition growth will undoubtedly slow, as there can only be a finite number of merchants willing to use the service. Consequently, the majority of revenues must come from repeat merchants.
In its S-1 filing, Groupon acknowledged that merchant retention was integral to revenue growth and achieving profitability:
If our efforts to market, advertise and promote products and services from our existing merchants are not successful, or if our existing merchants do not believe that utilizing our services provides them with a long-term increase in customers, revenue or profit, we may not be able to retain or attract merchants in sufficient numbers to grow our business or we may be required to incur significantly higher marketing expenses or accept lower margins in order to attract new merchants. A significant increase in merchant attrition or decrease in merchant growth would have an adverse effect on our business, financial condition and results of operation.
What is Groupon’s plan to ensure merchant retention? In the same filing, Groupon stated:
Our merchant retention efforts are focused on providing merchants with a positive experience by offering targeted placement of their deals to our subscriber base, high quality customer service and tools to manage deals more effectively.
Is there strategy effective? Unfortunately, Groupon doesn’t say. In a previous article, I identified a key measurable that Groupon fails to inform its shareholders. Groupon reports how many groupons are purchased in a given period but fails to disclose how many subscribers are actually purchasing them. Along the same vein, Groupon informs us how many merchants were featured in a given period, but they refuse to inform us how many of them were repeat merchants (those who use Groupon more than once). In a letter to CEO Andrew Mason dated June 29, 2011, the SEC made it a point to highlight this omission in Groupon’s S-1 filing and requested it disclose this key information to shareholders. Groupon failed to do so in its amended September S-1 filing, which can only raise negative implications as the following case study may illustrate.
On September 10, 2011, Groupon published its deal of the day for a Houston seafood restaurant called Ragin Cajun. The well-known local restaurant gave customers $40 worth of its tasty cuisine for just $20. The deal ended quickly and successfully, with over 5,000 groupons purchased. I was fortunate enough to get in on the receiving end of this great bargain. The following weekend, I went to the restaurant and used my groupon for $40 worth of shrimp and oyster platters. The restaurant was packed, and it seemed everyone in line had a printed groupon voucher in hand. Interestingly, before we could redeem our groupon, the cashier made each and everyone of us fill out a brief questionnaire. The slip asked for some personal information, one of which was our email address. Not long thereafter, I received an email from Ragin Cajun (see below):
As you can see, Ragin Cajun essentially decided to cut Groupon out of the equation. Essentially, the restaurant asked itself this question: What does Groupon do that warrants a 50/50 split in proceeds? The answer: they have the email addresses of people who might be interested in our kind of food — and nothing more. Instead of using Groupon again and splitting the proceeds down the middle, Ragin Cajun just decided to duplicate Groupon’s service. It took the email addresses of all those who redeemed the groupon and sent a mass email to those customers offering another discount (now only 25%), only this time, they stand to pocket all the money. I have yet to see another Ragin Cajun groupon offering, and I highly doubt I will see one again.
What the Ragin Cajun example proves is the unlikelihood of merchants using Groupon more than once. Many businesses may not view the Groupon service as a long-term strategy to increasing profitability. Rather, they view it as a potent promotional tool to get customers they once could not access in the door. Once that is accomplished, they will cut ties with Groupon and use their own resources at a notably lesser expense to market their product. This is especially the case when it comes to the merchants in the food and beverage industry where the deals just aren’t economically feasible. The mark-up in your traditional dine-in local restaurant is 300%, give or take. Taking this figure, Ragin Cajun’s break-even price point for its deal of the day was about $13.33. Because the restaurant only received $10 per voucher (the other $10 went to Groupon), it took a $3.33 loss per voucher redeemed. Clearly, the restaurant took the one-time loss for purposes of expanding its customer base. For those who may be skeptical of the numbers, the proof is in the pudding. The restaurant didn’t use Groupon again, and it marketed the same kind of deal but with just a 25% (as opposed to 50%) discount on the meal the second go-around.
Groupon must figure out a strategy to incentivize their merchants to repeatedly offer their products/services without affecting its profit share. It does not have the luxury of continuing to sustain losses before realizing a gain like its much bigger competitors, Google (GOOG) and Amazon (AMZN). Groupon’s goal of becoming a profitable enterprise will lie in large part with its ability to convince its merchants that its service is more than just a marketing tool, but also a legitimate way to turn a profit.
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If I were to tell you that for just $250 you could be an NFL owner, you’d probably call me nuts. But for the first time in over ten years, you can make your dream of becoming an NFL Franchise owner a reality. Earlier in the month, the Super Bowl Champion Green Bay Packers (which is the only team owned in its entirety by common folk like you and I), offered on its website the chance for any individual to purchase a “share” in the company at the price of $250 with a limit of 200 shares. The offering of 250,000 shares is the first one made available to the public since March of 1998. The Packers will use the more than $60 million in proceeds to renovate the stadium. But before you get all giddy and start dabbing into your rent money to get in on the action, let us consider first if this is a worthy investment.
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With the recent news of Zynga (ZYNG) soon to be trading on the block, much has to be said about 2011’s attack of the Internet IPOs. From Linked In’s (LNKD) offering in May to the debut of Groupon (GRPN) and Angie’s List (ANGI) last month, the online social media onslaught has been in full effect. While the recent IPO run has been quite the roller-coaster ride for both bulls and bears alike, investors should be extra weary and tread carefully before buying into the Zynga hype.
Zynga is a social network game developer that publishes free online games accessible to hundreds of millions worldwide. It generates revenue by selling virtual items to be used in the games. As of the close of the first quarter 2011, the company boasted of having 236 million active monthly users (coined “MAUs”) and 62 million daily active users (“DAUs”). Unlike the Internet IPOs that have preceded it, Zynga has recorded net profits for fiscal year 2010 through the first quarter of 2011, $90.5 million and $11.8 million respectively.
According to their SEC S-1 filing, Zynga plans to sell a little over 11% of its diluted shares, or 100 million shares, between $8.50 and $10.00 each. Using a midpoint range of $9.25, Zynga is valuating itself at around 9 billion dollars, quite the hefty price tag. The IPO offering would be the largest by an Internet company since the behemoth Google (GOOG) raised $1.7 billion in 2004. While the company sports an impeccable reputation among its users and a history of actually turning a profit, there are significant pitfalls that lie in the wake.
Only one will be mentioned in this article and that one may be enough to cause serious concern – Facebook. Facebook is no doubt Zynga’s closest ally. Facebook is the primary, if not the exclusive, platform for which users play Zynga games. Through this platform, Facebook also shares critical personal user data with Zynga. Zynga in turns processes, stores, and uses this valuable information to target potential new users within the social network.
Financially, more than 93% of Zynga’s gross revenues come from Facebook. While the games are free, players purchase virtual items from Zynga to enhance their gaming experience. However, to do so, the players must use a form of virtual currency called “Facebook credits.” Facebook keeps 30% of this revenue and delivers the remaining 70% to Zynga.
Without doubt, Zynga would not be where it is today without Facebook. But for those very same reasons, Facebook may soon become Zynga’s worst enemy. In it’s S-1 filing with the SEC, Zynga admits that one of the risks associated with its business is if it is “unable to maintain a good relationship with Facebook.” That is quite the understatement. Facebook controls the platform that nearly all gaming occurs on, the provision of users and information required to expand the business, and the payment scheme to which Zynga is able to stay afloat.
Facebook also has broad discretion to change the terms of service with Zynga at any time. It can terminate any and all contracts in place or change the terms thereof. An example of such occurred in 2010, when Facebook initiated a proprietary policy requiring all applications on its network to accept only its virtual currency, Facebook Credits, as payments from its users. By doing so, Zynga’s profits took a sizeable hit, because it now had to share a much greater percentage (30%) of its proceeds with Facebook than before. Another example of Facebook’s influence on Zynga occurred in the early part of 2010. Facebook instituted a number of policy changes for application developers like Zynga that inhibited communication channels among users. Zynga noted that because user interaction was integral to the games they offered, the number of users on Facebook declined.
Zynga’s only defense to Facebook’s enormous influence would be to divorce itself from the Facebook platform. While Zynga has planned to create an alternative gaming platform dubbed “Project Z,” it is restricted under a five-year contract from releasing any game integrated with Facebook on another platform. Zynga generates the vast majority of its income on just a handful of games, all of which are played on the Facebook platform.
In summary, Facebook has Zynga by its jugular. It could single handedly put Zynga out of business by altering or discontinuing access to its platform. Before you say that is extreme or unlikely, consider this. It is pretty much a given that Facebook will inevitably come out with an IPO sometime in 2012. Zynga admits that there is very little to no barrier to competition in the online gaming sphere.
If it willed, Facebook could use the new funding raised to develop its own gaming system on its platform and exclude Zynga completely. Or if it decided not to take that route, they could just as easily enter a more financially equitable relationship with a Zynga competitor.
Ultimately, the question becomes what is the more prudent investment: buying shares in a Zynga IPO or a Facebook IPO? The latter seems to be the safer and sure-fire bet.
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Groupon (GRPN) has incurred a net loss annually since the company’s inception. As of the end of the first quarter of 2011, the local online advertiser faced an accumulated deficit of $522.1 million dollars. Groupon makes their money by keeping 50% of what the customer pays for the coupons it advertises on its website and mobile applications. While that sounds financially lucrative at first glance, a closer look at its business model exposes serious viability issues.
Groupon’s success is for the most part dependent upon two critical operating metrics: (1) Growth of subscribers who actually purchase vouchers, and (2) attracting new merchants to its already expansive list. As of March 31 this year, Groupon had more than 83 million subscribers while advertising the products and services of 56,781 merchants (the number of merchants featured in the first quarter 2011).
While Groupon has seen incredible growth since its infant days in 2008, it is highly unlikely to keep pace in the years to come. The primary reason for this is competition. When current CEO Andrew Mason thought of the idea for Groupon, there was little to no business entities in the arena. Now, there are more than 500 sites worldwide, with over 100 in the United States. Yes, Groupon has penetrated markets in South America, Europe, and the Middle East, but what have they done to distinguish themselves? What is unique about the service they provide? What do they offer that no other company can? The answer is – nothing.
The only way for Groupon to succeed in subscriber and merchant growth in the long term is to separate itself from the competition. High growth companies like Apple (AAPL) have been able to thrive because of their ability to innovate. There is nothing in Groupon’s business model that ensures it stays one step ahead of the competition. Big companies like Amazon (AMZN), through its investment backing of LivingSocial, have seized opportunities and enjoyed success. Google (GOOG), which once tried to acquire Groupon for approximately 6 billion dollars, has ventured into the field with its new Google Offers program. With close to a billion subscribers, Facebook will also inevitably become a dominant player in the game. Without that “it” factor, Groupon cannot continue to add subscribers anywhere near its historical rate.
The presence of other companies also provides plenty of options to merchants. Merchants may find better voucher percentage sharing programs with other companies or a faster reimbursement system (Groupon pays its merchants 60 days after the coupon has been redeemed). With more than one company providing a nearly identical advertising service, and the possibility of better financial arrangements, it will be difficult for Groupon to maintain growth in its merchant index.
Interestingly, the 2 components vital to Groupon’s success were also the two critical driving forces behind another popular company that has recently come under intense pressure – Netflix. Netflix (NFLX) was dependent on not only growing its subscriber base for its DVD and online streaming service, but also to retain and add to its content providers. Netflix succeeded in both areas for some time and saw it’s stock skyrocket as a result. However, the moment it suffered a retraction in the number of subscribers this past quarter, it’s stock took a swan dive (it is currently trading at just over 20% of its year-to-date high). The subscriber loss was largely attributed to an increase in monthly fees. Presumably, executives felt it necessary to raise fees to grow profits as opposed to concentrating on subscriber growth. If that is the case, it cannot bode well for Groupon, which already operates at a loss while reaping a hefty percentage (50%) of the profits with its merchants.
Coincidentally, Netflix shares a common enemy with Groupon, namely Amazon. Amazon has built a formidable library of streaming titles in its Amazon Prime service by striking deals with CBS and NBC Universal. In addition, Time Warner has expanded its streaming video service and Apple has slowly been adding video streaming to its iTunes service. Netflix’s loss in subscribers is one factor in their recent troubles. They have also struggled in maintaining content. It lost its contract with Starz and will not be able to have access to big name movies from the likes of Sony (SNE) and Disney (DIS) after February 2012. Ultimately, Netflix was a “growth stock” that stopped growing.
Groupon seems destined to follow the same path as Netflix. While it may have some success in the short term like Netflix, competition with deeper pockets will eventually catch up harming subscriber and merchant growth. As this happens, the current deficit will spiral out of control, quarterly losses will continue, and its stock will take a significant hit.
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Chancellor Angela Merkel and President Nicholas Sarkozy did their best impression of Vito Corleone in their rendition of the Godfather today. The leaders of Germany and France respectively were able to broker a deal to save Greece from falling into bankruptcy by basically passing on a big chunk of the country’s debt to private banks holding Greek bonds.
For those of you who don’t quite understand what is happening in Europe, let me try my best at simplifying this mess. Think of Greece as a company whose operating costs are much greater than their sales (Greece’s debt was 160% of its Gross Domestic Product). So what does a company do to stay in business while it loses money “temporarily?” Borrow! Greece did just that by selling tons of bonds to banks, but it got to the point where banks stop lending. Unfortunately, Greece was still in a pickle and had no one to lean on…so it turned to its family members. In this case, that family is the Eurozone, which is an economic union of 17 European countries. Now this family, just like any family, has a momma and poppa who provide for the little ones. The Momma and Poppa of the Eurozone is Germany and France. Now these responsible parents set up a savings account called the EFSF (European Financial Stability Facility) in case any member of the family was in a bind and desperate for cash. Now while each family member was supposed to chip in to this big piggy bank, Momma and Poppa did most of the work by guaranteeing nearly 50% of the One Trillion Euro fund (about 1.4 billion dollars). But because of the losses sustained during the global recession, only 250 billion was left. So when little ole Greece came asking for more than half of what was left to pay off the banks it owed, what did good ole Momma and Poppa do? True to mobster form, Merkel and Sarkozy paid a visit to those creditors.
Picture an old Italian restaurant in the backstreets of Sicily. The restaurant is dimly lit, tables are spaced too close to each other, and there’s not a single patron in sight. In the far corner table is a man well dressed, hair parted to the side, wearing black-rimmed glasses. His briefcase is laid out on the black and white checkered tablecloth with a bunch of documents littered in fine print too small for the eye to see. In walks a chubby middle-aged woman and a skinny gray-haired man with an evil grin cheek to cheek. They walk up to the corner table and have what is normally called a “sit-down” in this part of town. After exchanging a few pleasantries, Momma picks up the documents in front of the well-dressed man and tears it to pieces. The well-dressed man immediately becomes hostile, but Poppa simply points his finger and the man is staring down the barrel of a 357 magnum being held by none other than the waiter. Momma pulls out a single sheet of paper from her coat pocket and says “sign it or else!” And just like that Greece wiped out $100 billion Euros off its debt.
While it is a bit dramatized, this Italian restaurant scene is basically what happened in some conference room today in Europe. Leaders from Germany and France met with these private banks that were owed hundreds of billions of Euros by Greece and somehow “voluntarily” accepted a 50% cut in its bond investments to reduce Greece’s debt by 100 billion Euros. They “voluntarily” gave up 100 billion Euros? Who are these guys kidding? Can you imagine what was really said in that boardroom? My guess was “take a 50% loss or 100% loss, which is it?” {With Germany and France’s tanks behind them and Blackhawk helicopters hovering above, lol).
Now what about the rest of the money owed? You think Germany and France are going to use that piggy bank? HELL NO! Just like a famous mobster once said, “never use your own money to start a business,” Momma and Poppa followed suit. Instead of dipping in to what’s left of the EFSF, Momma and Poppa created some perks and incentives to anyone daring enough to invest and repair the Eurozone’s debt crisis. Essentially, they are hoping China will take the bait and throw money at them and odds are they’re right.
And Momma and Poppa will be back sitting in the corner table of that old Sicilian restaurant puffing on big fat cigars toasting to a “hard” day’s work.
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