Groupon Gets It Wrong

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Uh-oh. Just after Groupon (NYSE: GRPN  ) confessed that it hadn't exactly gotten its recent accounting right, the SEC announced it would be nosing around the company's finances. Groupon's "errors" compelled the firm to restate its results downward by tens of millions of dollars. Predictably, the shares tanked on this ugly news. This didn't help the reputation of the market's recent crop of IPOs, of which Groupon was a charter member. But fear not, there are better new firms with sturdier business models to invest in.

Revenue on a sharp rise
Groupon made a splash when it first launched online, as its business model was fresh and compelling at the time. Every day it featured deep bargains from local firms. Where else could you get that many free donuts or 50% off a flying lesson? Accordingly, revenue took off quickly like...well, a low-cost flying lesson, zooming from $14.5 million to $312.9 million to $1.6 billion from 2009 to 2011.

Profitability was and remains elusive, but such are the ways of young and fast-growing companies. Groupon was and is a hit, to the point where the company name has almost become a common noun for "getting a nice deal on the Internet before it expires." It's inevitable that it'll start turning a profit at some point, right?

No fences here
Er, probably not. The one hole difficult to plug in such a business model is the near-total lack of barriers to entry. It's a fairly simple matter for a company to ink deals with local and national vendors to offer Groupon-style deals.

This is already happening with some big Web names that don't want to be left out of the party. Not long ago Amazon (Nasdaq: AMZN  ) begat its Local sites, which have reliably cranked out deals-of-the-day that are easily the equal of Groupon. The same goes for Google's (Nasdaq: GOOG  ) Offers suite of websites.

The advantage an Amazon or a Google has is that it can point toward those deals while users are surfing one of their sites. A Google search or an Amazon buy can lead to the purchase of a coupon, given clever ad placement nearby on the page. Meanwhile, smaller players like privately held LivingSocial are also slinging coupons, further eroding Groupon's market share and ramping up competition.

There are prettier guests at this soiree
Companies new to the market are always inherently attractive, as they're freshly infused with cash and usually on a sharp upward revenue trajectory. Fortunately, there has been a pile of IPOs in recent months to choose from, and there will be even more in the wake of Facebook's upcoming debut.

Many of these are a lot more appealing than Groupon. For example, Proto Labs (NYSE: PRLB  ) has a unique business model centered on producing molded plastic parts on demand and delivering them quickly to customers. Revenue is growing, and the company is profitable. And unlike our troubled Groupon, its barriers to entry are formidably high -- after all, it's pretty hard to HTML-code an injection molding machine. Also in contrast to Groupon, Proto Labs sits well above its IPO price at just over $35, compared with $16 at issue.

More famously, shares of business networking site LinkedIn (NYSE: LNKD  ) have blown past reasonable expectations, rising 128% to $102.64 from their debut at $45. Although the company is fairly one-dimensional and its stock has a scary forward P/E of 163, LinkedIn has been moderately profitable of late and boasts a wide user base, so investors have some basis for investing in it.

Another plus for both companies is that neither has restated its earnings or been the subject of an SEC probe in its young life, unlike certain other recent IPOs we could name. So look for both to continue doing well in terms of share price -- though here we'd have to give the edge to Proto Labs, as its fundamentals are stronger, its business model more compelling, and its stock not as "discovered" (i.e., pumped up in price) as LinkedIn.

While Groupon's business model gives me pause in a big way, The Motley Fool recently uncovered a stock it thinks has outsized potential for investors -- so much so that we named it our top stock for 2012. You can read all about it in a free research report, courtesy of The Fool. Just click here to access your free copy today.

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool owns shares of LinkedIn, Google, and Motley Fool newsletter services have recommended buying shares of LinkedIn, Google, and The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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

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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 April 09, 2012, at 8:00 AM, bjgibson722 wrote:

    You also didn't mention that the insider sale ban after the IPO will end in early June. It had been in May but was pushed back because they will report results in early May.

    What do you think will happen? My guess is that a bunch of insiders will want to sell which will put even more downside pressure on this stock.

  • Report this Comment On April 11, 2012, at 2:46 PM, naughtyguy wrote:

    Groupon should have sold out to Google. Google now has (I think that is the name of it). It hasn't come to my rural area yet, but it has the capital to really grow and steal market share from Groupon. I have used 31 Groupon coupons and have never gone back to any of those businesses except with another groupon. Great for the consumer, but not for the business.

    In June the insiders will dump a lot of stock! Expect them to push the price up and cause a short squeeze first. (But what do I know?)

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