On Groupon’s crash and the popped web 2.0 IPO bubble

By Edward Harrison On Aug 14, 2012

I have a ton of links today so I am going to do this in two parts. Here are the links I have so far and I want to concentrate on the popped Web 2.0 bubble in the wake of Groupon’s earnings and subsequent share price slide.

Web 2.0 is for real. I know that may be a strange way to start a post on Groupon and the Web 2.0 IPO bubble but it’s true. Companies like Facebook are not just profitable but hugely profitable, not something we could say about the darlings of the Tech bubble like AOL, Amazon, WebVan or many other companies. Yahoo was probably the most profitable of the big tech bubble companies to go public early. It was only after the bubble burst and eBay and Google came to market that we actually saw real earnings at any of these IPO companies. So, that is the context. Web 2.0 is for real.

Moreover, the business models at some of these companies are very solid. Facebook has tons of user engagement for an addictive product in a space it now dominates. The question for Facebook has always been valuation and revenue per customer, not business model. A smaller niche player Yelp is doing well as is LinkedIn. Again, these are two businesses with well defined business models and strong execution. Their stock prices are also way up as a result, this despite a lot of angst about LinkedIn tanking after going public.

But Groupon was a dog from the start. It was plagued by accounting shenanigans. It had low barriers to entry and massive losses when it started its IPO. None of this justified its massive valuation. The company saw an opportunity to cash in and so it went for it. But Groupon simply wasn’t ready for prime time and it now shows in the execution and share price. It’s as simple as that.

And just because many of these companies are ready for primetime, doesn’t mean a bubble can’t form. Expectations have got way out in front of these companies and the valuations are what are problematic.

Let me repeat a few things I have said in May about this bubble.

16 May 2012 – On JPM’s Dimon’s still unassailable position and Facebook as the new Yahoo.
On Monday, we also talked about Yahoo and the oversubscribed Facebook IPO, which seems to be a major pump and dump, that I believe could add to downside market sentiment if a second half slowdown takes hold. For me, Facebook is interesting because despite all the hoopla surrounding the company and the huge market cap, Facebook is still a company in its infancy. It was just started in 2004 and is therefore only 8 years old.

If you compare Facebook to Yahoo, the other company we discussed at length, that would be 2003 on Yahoo’s corporate timeline. At that time, Yahoo was just in the beginning of an enormous surge that took the stock from under $5 a share to over $40. I worked at Yahoo at exactly that time. And while the ride was good for employees cashing in stock options, I can tell you my first hand experience at Yahoo was that the surge was mostly cyclical; it was a technical bounce precipitated by the extreme lows in 2002 and the housing bubble the Fed was busy creating. Underneath Yahoo’s Internet media strategy was falling apart as Google ate its lunch in search.

I am pretty sceptical on Facebook. They are going to have to execute really, really well to justify the IPO valuation. And while they have done well so far, the problems at Yahoo show you what can happen when an Internet company is not ready as it moves into the big time.
21 May 2012 – Daily commentary: On Facebook’s IPO, JPMorgan’s losses, Spain’s bank run and Greece’s exit. Facebook’s share price collapse is a bit surprising. I have had a working hypothesis for a while though that said Facebook would be able to get its deal off but that it would mark the top of the market, meaning the tech bubble would pop after indigestion from Facebook. So far, this seems to be the case. But we can see the topping pattern from multiple sides including Apple’s weakness despite a healthy beat last quarter and the recent overall market weakness. If you look at this from a macro point of view, it is beginning to look like the cyclical bull I believe it is – and that says we are in for major corrections back into bear territory as the economy rolls over. Personally, I’d like to believe the housing recovery story has enough legs to pull the rest of the economy along because the data are good, especially in the former bubble markets. There’s serious overshoot there. But my view is that this hinges on the policy response out of Washington and the looming fiscal cliff.

Those last sentences are still kind of my working hypothesis here. I think this expansion is rolling over and will meet its maker in 2013 but 2012 still has some legs in it, especially because of the cyclical bottom in housing. I don’t see recession yet, but I do think Facebook marked the apogee here and the IPO bubble has now popped. The window for immature companies has closed. Only the best and most mature pre-IPO companies are going to come to market now. And their valuations will not be nearly as high.

Here’s The Real Reason Groupon’s Stock Just Crashed – Business Insider

"Groupon’s "billings," the total value of the merchandise sold to customers (less expected returns), declined from last quarter.

This is because Groupon’s core business, coupons, is now shrinking."

Groupon Falls 14% On Slower Growth – WSJ.com

""There’s concern that daily deal fatigue is setting in," said Evercore Partners Inc. analyst Ken Sena. He added that thanks in part to the increased prominence of the Goods business, Groupon’s margin guidance is "weak.""

Groupon Falls 14% On Slower Growth – WSJ.com

Groupon shares nosedive as investors sell in reaction to slowing sales | Technology | guardian.co.uk

"Daily discount website that once grew rapidly faces declining momentum as shares fall 25% to an all-time low of $5.60"

Groupon Crashes To A New All-Time Low… – Business Insider

Good analysis of Groupon. The core business is shrinking, so it’s hard to decide how much that business is worth even if it is now profitable.

Groupon’s Accounting Still Evolving – Deal Journal – WSJ

Here’s GroupOn’s problem: accounting. It makes it look like GroupOn is hiding deteriorating numbers, lack of profitability or both.

Groupon Misses Revenue Expectations, but Profits Beat – Tricia Duryee – Commerce – AllThingsD

I don’t like Groupon. I don’t think their business model is going to work until there is a shake-out and/or sustainable economies of scale or barriers to entry. And they were overvalued at IPO. To me, this company is the poster child of IPO excess in Web 2.0. This company is all about growth. When that stops, so does the music. Turn out the lights.

That’s it. Here are the links.

Other links

ekathimerini.com | Cyprus economy shrinks 2.4 pct in Q2

"The dip marks the fifth successive quarter since Q1 2011 in which the island’s troubled economy has failed to grow"

Portuguese Economy Contracts for a Seventh Straight Quarter – Bloomberg

"Gross domestic product declined 1.2 percent from the first quarter, when it fell 0.1 percent, the Lisbon-based National Statistics Institute said in a preliminary report today. Economists predicted a decline of 0.7 percent, the median of nine estimates in a Bloomberg survey showed. GDP dropped 3.3 percent from a year earlier, the biggest decline since the second quarter of 2009."

Paul Ryan’s Fairy-Tale Budget Plan – NYTimes.com

There is much to recommend here in Stockman’s piece about the state of politics and budget. In particular, I like his comments about excessive "defense" spending, bank bailouts and Fed rate manipulation. While I don’t think the US is literally going to run out of money, it is clear that the resource allocation here is all wrong. Whether you agree with Stockman or not, you should read what he has to say.

Eigentumswohnungen : So teuer sind Deutschlands Städte – Börse + Märkte – Finanzen – Handelsblatt

With the housing boom in Germany in full swing here is a rundown of the 20 most expensive German cities for housing by square meter cost. Munich is at the top, alone with a cost of over 4400 euros per square meter. You don’t need to read German to understand the numbers and city names.

The only way out for China: Andy Xie – Caixin Online – MarketWatch

"China’s business conditions continue to deteriorate. Cement, coal and steel prices are still falling. Overcapacity is severe in most industries. Local governments pressure loss-making enterprises to continue production to sustain local gross domestic product. Hence, commodity prices are falling below total costs. Soon the prices may fall below variable costs."

Burke says city should consider seizing ‘underwater’ homes – Chicago Sun-Times

I am against this by the way. "“Given the size of the foreclosure epidemic in Chicago, the city should explore every possible avenue to keep families in their homes and reduce the number of vacant properties that breed crime and erode the stability of our neighborhoods,” Burke, chief sponsor of the resolution, said in a new release distributed on the eve of the hearing."

Apple TV vs. Roku vs. Nexus Q: Media streamers compared | TV and Home Theater – CNET Reviews

BBC News – Germany’s economy grows by 0.3%

"Europe’s biggest economy, Germany, grew by 0.3% in the second quarter, helped by exports and domestic consumption. France announced its economy had recorded zero growth in the period, which was better than had been expected."

Smith Barney to Retire Next Month – WSJ.com

Standard Chartered in talks to settle Iran laundering probe | Reuters

These talks have now been settled and SCB will pay a fine of $340 million.

Samsung exec told company to learn from Apple’s iPhone, not copy it

"An Apple v. Samsung court document filed on Monday reveals an e-mail in which a top Samsung designer said to "learn through the lessons of the iPhone," not to make replica handsets based on Apple’s popular designs."

Gov’t Loss on Auto Bailout Rises – NYTimes.com

"The government spent about $80 billion to bail out GM, Chrysler and Ally Financial, the former finance arm of GM. So far it’s gotten back just over $37 billion."

Back-to-school shoppers in no mood to splurge | Reuters

Retail sales from July suggest it may be otherwise. The number came in up 0.8%, breaking the string of down retail numbers.

Dutch Socialists Gain on Anti-Austerity Platform – WSJ.com

"A far-left-wing party is emerging as a front-runner in next month’s elections in the Netherlands, as it benefits from growing voter resentment toward the German-led austerity drive and euro-zone bailouts."

Amazon and the Non-Level Retail Playing Field – Richard Harris – Voices – AllThingsD

"Amazon’s ad revenues may not be padding its bottom line, but those dollars are funding ongoing investments and innovation, which might be even worse for the competition. Amazon’s competitors need to successfully monetize the value of their site traffic — or continue to play on the non-level playing field Amazon has created."

Here’s Why Global Macro Hedge Funds Are Getting Slammed – Business Insider

"The inflows into New School Macro and the nature of the fundamental events unleashed by the crisis increased massively the popular focus on macro issues. This, in turn, fed the growing trend toward Tourist Macro. Everyone constantly talked global macro. Everyone wanted to be global macro."

Greek Recession Making Bailout Targets Harder to Meet: Economy – Bloomberg

"Greece’s economy contracted for a ninth straight quarter, making it harder for the government to meet the budget-reduction targets required under the country’s international bailouts."

Paul Ryan sold shares on same day as private briefing of banking crisis | World news | guardian.co.uk

BBC News – Google buys Frommer’s travel guide business

This purchase is about reviews. A while back Google was caught integrating the reviews of Yelp into its site against Yelp’s wishes. That was worked out. But it was clear that Google wanted more ‘content’ for its local initiatives and now they are getting more, at least in travel.

Problems Riddle Moves to Collect Credit Card Debt – NYTimes.com

Here’s what I believe is the source piece for the media commentary on credit card securitisation/ownership problems. Very ugly stuff

Judge: 90% of Credit Card Lawsuits Can’t Prove Borrower Owes Money « naked capitalism

This article is in line with the Tech Ticker video I posted showing that the securitisation of credit cards is creating a big problem in banks’ proving who owns the credit card receivables and thus has a right to enforce payment. Exact same problem in mortgage securitsation