Groupon: In Your Face, Google!

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Like a group of single friends hitting Vegas after one of them is jilted at the altar, Groupon can cheer up after raising $950 million in a venture capital round on the rebound.

We may never know all the details behind the collapse of what was rumored to be a $6 billion deal between Groupon and Google (Nasdaq: GOOG  ) , although it was likely an exercise in futility anyway, since antitrust regulators would have been unlikely to approve the pairing.

So Groupon has moved on. But is raising this kind of dough overkill? Isn't this supposedly a model with margins wider than the ocean, giving the social coupon site the means to print its own money?

Well, scaling quickly is never cheap. Over the past year, Groupon has launched or acquired its way into 35 countries. The number of city-specific markets springing daily deals has grown from 30 in 2009 to 500 today.

Some other nuggets from Groupon's "in your face, Google" press release:

  • Groupon grew subscribers by 2,500% over the past year -- from 2 million to more than 50 million.
  • The site saved consumers more than $1.5 billion last year (though Groupon addicts would argue that it actually cost them more than $1 billion).
  • Groupon has brokered deals on behalf of 58,000 local businesses, serving up more than 100,000 deals worldwide in 2010.

The first and third bullet points explain why everyone wants to either be Groupon or buy the site outright.

Groupon's lightning-quick subscriber growth has drawn OpenTable (Nasdaq: OPEN  ) , Travelzoo (Nasdaq: TZOO  ) , Yelp, and The Knot (Nasdaq: KNOT  ) into offering similar programs. It also doesn't hurt that Groupon receives as much as 50% of the voucher prices it sells through its daily deals.

The merchant appeal explains why both Google and Yahoo! (Nasdaq: YHOO  ) showed interest in gobbling up Groupon last year. If advertisers are spending money to smoke out new customers through Groupon, that's money they won't need to be spending through local paid search ads on Google and Microsoft's (Nasdaq: MSFT  ) Bing.

Will this be a passing craze? Is Groupon the next great online advertising platform? Obviously, a consortium of early investors with deep pockets seem to believe that Groupon is just getting started. They may be getting Groupon on the rebound, but that's better than not having a shot at all.

Are Groupon and its smaller peers a passing fad? Share your thoughts in the comment box below.

Google and Microsoft are Motley Fool Inside Value recommendations. Google, The Knot, and OpenTable are Motley Fool Rule Breakers picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz is a fan of discount sites, and he's already tracking local deals through Groupon and LivingSocial. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2011, at 11:47 AM, SteppenWulf wrote:

    I must admit I think the valuations on this company are crazy.

    Sure they have revenue around 1B, which leaves the alleged Google deal value at around 6x revenue. And they have amazing growth.

    But they don't have anything proprietary or any moat that I can see. I use Groupon, but there are a number of other companies that have come out with similar services in my area. They all come to my email, and I can scan them quickly and choose what I am interested in.

    I can't see the consumer being loyal to any coupon site, unless they develop some very sticky Web 2.0 interface, like Amazon. And I also don't see advertisers being loyal to any site - everything will be based on price and effectiveness.

    There are already a huge number of companies in the coupon business. There are also lots of companies that have regional information-based businesses. There are also internet sites focused on local info, such as Yelp. All these groups have the potential to create effective competition quickly, without a big ramp-up.

    So, within a year, I would expect competition to go through the roof. Competition will pressure Groupon's margins and slow their growth.

    With good marketing and a focus on stickiness to consumers, Groupon could be a successful company in the long term. But it's valuation is at least an order of magnitude too hign.

  • Report this Comment On January 12, 2011, at 10:48 AM, Brent2223 wrote:

    SteppenWulf - I agree with your concerns, but still think Groupon would be an interesting investment. I have the same concerns with Priceline, which I think is a very similar business model. The market seems to put a much higher value on the relationships these companies have formed. Still not buying into these valuations yet, but not completely writing these off anymore...

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