- Social web companies now need growth and profits to survive.
- Groupon failed to scale, requiring too many writers and salesmen to meet sales goals.
- When everyone loves your stock, sell.
Every technology trend goes through a hype cycle. There is excitement over the trend, a rush of sales and sometimes earnings, then a fall toward reality, whatever that reality happens to be.
Groupon, which went public in 2011, is considered a social media company, although it’s not nearly as self-service as most. The idea is that a business will make an offer, at a good price, consumers will sign up for e-mails and accept that offer, and then the offer will go to the market. The high volume brings in customers to the business, and opportunity. Consumers get a bargain.
The problem is that the process turns out to be highly labor intensive. Groupon has never shown anything on the net income line. Revenues doubled between 2011 and 2014, from $1.6 billion to $3.1 billion, but all that did was narrow the loss from $280 million to $73 million.
Organizing the offers, writing the offers, convincing businesses to make the offers – these all take labor, and labor is the enemy of Web profitability. You want the company you invest in to be as self-service as possible, to be run by programmers and not by salesmen.
As Groupon cut back on labor to try and achieve profits, it wound up losing business. Revenues for the first quarter of 2015 were $750 million. For the third quarter, ending in September, they were $713 million. Groupon has shown itself incapable of cutting its “Selling, General and Administrative” expense total, the dreaded “SG&A,” which came in at $342 million in the first quarter, and nearly $388 million in the third.
This is why investors gave up on Groupon stock during 2015. The stock started the year at $8/share, and starts 2016 at roughly $3.
During the fourth quarter Groupon cut 10% of its staff, then tried a management shakeup, bringing in Rich Williams as CEO. Williams had been with Groupon since June, 2011, but boasts experience at both Amazon (NASDAQ:AMZN) and Experian (OTC:EXPGY).
While it is possible that the new team will be able to make Groupon more self-service, and even eke out a profit, the fact is that the hype cycle for social has reached its end. Companies in this space can no longer get by on hype, or hope, or promises. They have to deliver on the bottom line, and investors aren’t going to pay extravagantly for those earnings, either, not unless there is spectacular top-line growth attached to them.
Last week industry publication TechCrunch featured a story saying Groupon may go private but no take-out group was named. This followed a wistful post at blog site Medium by shareholder Andrew Mason. The hope seems to be that Groupon can re-build itself as part of the local web, a way in which small merchants finally take the online bull by the horns, after 20 years of the Web.
But, as I noted at the top, don’t buy hope and don’t buy hype. Groupon has reached the end of its hype cycle, and if you’ve been hoping for better it may be time to take your losses and remember to never again fall in love with a stock. When everyone else falls in love with it, sell the stock.