3 Reasons to Short Groupon

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In just a few days as a public company there has already been a wide-ranging debate about whether Groupon (NAS: GRPN) is a long-term business or a fad that has captivated the country. Fellow Fool Rick Munarriz made a compelling argument that Groupon and Google (NAS: GOOG) had very similar valuations and skepticism at the time of their IPOs. And last night fellow Fool Sean Williams gave his reasons for not buying Groupon.

I'm a fan of Groupon, I've used its deals a few times, but this isn't a stock I would go anywhere near. In fact, it's a stock I'm considering shorting for these three very important reasons.

A loss leader isn't a business model
Remember the joke about Internet companies making up negative margins with volume? It was a common theme when the dot-com bubble was building that volume would solve everything. Somehow having more viewers would make up for the fact that a company was losing money on each customer, and I see a lot of the same with Groupon.

The cold hard fact is that Groupon is building a business on top of its partner's loss leaders. Why would a successful business want to give 50%+ discounts on their products when loyal customers are willing to pay full price? I used a Groupon for a breakfast this weekend at a local diner that is packed with customers every morning of the week. I would have paid full price, but a 50% discount for a place I frequent was a steal and I saw other customers using the same deal. Why should that successful business be a repeat customer?

Owners are already on their way out
Usually an IPO is the first opportunity for an owner in a business like Groupon to cash in on years of hard work. Venture capitalists aren't fond of letting founders cash out until they can do the same for themselves, but Groupon's meteoric rise broke all the rules. Of the last $130 million that was raised, $120 million went out the door to founders, a payout that reminds me of a scheme that rhymes with Shmonzi.

If you can't value it, run
How are we supposed to value Groupon? It isn't making money, so are we supposed to use merchants or subscriber numbers or maybe even employees?

With a $20 billion market cap, Groupon was worth $240 per subscriber as of March 31, $352,000 per merchant, and $2.8 million per employee. That seems steep no matter how you slice it.

At least recent Internet IPOs Google and LinkedIn (NYS: LNKD) were profitable or darn close when their IPOs came out. Groupon seems more like a leap of faith that someday the company will quit spending buckets of money on marketing and get in the black. But with LivingSocial, backed by Amazon (NAS: AMZN) , and a million other competitors breathing down its neck, I don't see it happening.

I'm putting my 96 CAPS rating on the line by giving Groupon a red thumbs-down on My CAPS. Do you think Groupon is a good short or am I discounting the business? Leave your thoughts in our comments section below.

At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Amazon.com and Google. 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. The Motley Fool has a disclosure policy.

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