Why Groupon Will Never Be Great Again

The Groupon (GRPN) craze was great while it lasted.

The daily deals purveyor has never been more popular. Groupon closed out 2011 with 33 million active customers across 47 different countries. Quarterly results posted on Wednesday night show a company that is growing quickly.

However, there are more than a few signs that "Groupon fatigue" is kicking in.

First, the good news. Groupon saw its quarterly revenue soar 194% to $506.5 million, well ahead of the $475.2 million that analysts were expecting. The adjusted loss of $0.02 a share was less than the $0.03-a-share profit that Wall Street was forecasting, but the adjusted figure actually includes a $0.07-a-share hit on international taxes paid in countries where it is now profitable. Yes, Groupon is an international play now, with 63% of its revenue trickling in from outside North America.

Operating income actually clocked in at a positive $15 million. More impressively, free cash flow soared 248% to $155.1 million.

This certainly doesn't seem like a company on the way out. How dare anyone accuse Groupon of peaking?

Well, let's get to the darker side of this growth story.

Group Off

Groupon conveniently left out its subscriber count from Wednesday's report. When it went public late last year, the dot-com speedster let investors know that it had 142.9 million subscribers but only 29.5 million cumulative buyers as of the end of September. In other words, only roughly one-fifth of those receiving Groupon's daily blasts were ever wooed into actually buying one of the company's local deals.

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This time around, Groupon is letting us know that active customers are up 275% year over year to 33 million. It's an impressive number, but what do you think it means when the customer count is growing faster than revenue? Lower revenue per customer? Well, that's another metric found in November's S-1/A filing but not in Wednesday's 8-K.

If you're hungry for another big number that hints at something problematic, consider that gross billings soared 201% to $1.25 billion. This is the amount that Groupon charges customers for its deals after backing out any applicable taxes and refund estimates. The difference between gross billings and its reported revenue is what Groupon shells out to the 250,000 merchants offering city-specific deals on its website. Remember how revenue grew at a 194% clip? What do you think it means when gross billings are growing faster than revenue? Yes, Groupon is resorting to paying its merchants a bigger cut of the deals to keep them coming.

The 50/50 split that many assume takes place between Groupon and its lead-hungry merchants is a myth. Groupon's take is now closer to 40%. As distant silver medalist LivingSocial and even smaller rivals get more generous on their terms to win jaded merchants, Groupon will have little choice but to play along.

The Business Model Smells Funny

There's no shortage of horror stories from merchants who have experimented with the daily deals websites only to find that they attracted spendthrift one-time customers. There are also plenty of subscribers who have seen their pre-paid discount vouchers expire without being used. Maybe you didn't want that Brazilian wax after all. Maybe your wife wasn't impressed with the insinuation behind the pole-dancing classes voucher.

However, we still don't know if this will ever be worth it for Groupon. The company has accumulated a deficit of $676.6 million since launching less than four years ago. If the company were to curb expansion and scale back marketing costs, it would be pretty profitable, but what if this is a passing craze? Weren't radio stations and newspapers offering similar flash sales and discounted dining programs a few years earlier? Where did that get them?

With 632.8 million shares outstanding after November's IPO, Groupon went public with a market cap of nearly $13 billion at its $20 offering price.

Yes, it got the next laugh on Google (GOOG) after a reported deal to buy Groupon for $6 billion failed to materialize. But who will get the last laugh?

Facebook, restaurant reviews website Yelp, and dining reservations leader OpenTable (OPEN) have all bowed out of selling Groupon-like vouchers. They wouldn't be so quick to leave if there was potential in this niche.

Groupon's outlook for the current quarter is intriguing. The deal maker sees operating income of $15 million to $35 million, so there should be improvement there. However, the $510 million to $550 million in revenue that Groupon is targeting doesn't call for much of a sequential boost. We're looking at just 1% to 8% improvement over the fourth quarter it just wrapped up. Since Groupon's North American business is growing slower than its international operations, are we about to see Groupon's stateside business decline? At the low end of Groupon's guidance, that's probably what we will see.

Ouch!

Oh, and before bulls argue that sequential analysis isn't fair when pitting the holiday quarter against the seasonally lamentable first three months of the following year, it should be pointed out that revenue posted a 72% sequential burst during last year's freshman quarter.

Groupon isn't going away. Its debt-free balance sheet is flush with $1.1 billion in cash after the IPO and earlier financing rounds. As weaker players crumble -- and they will as consumers tire of handing over voucher printouts and mobile phones -- Groupon may appear to be the beneficiary.

Don't buy it. This is a harder model to pull off than it seems on paper and it may not be long before only merchants who need to deeply discount their food and spa services to attract customers will be participating. A year ago, Groupon shut down the social component where users could comment on deals. It was a great way to expose iffy merchants or question the advertised savings. Now Groupon limits the communication to questions that get answered.

What's Groupon hiding? You probably don't want to stick around to find out.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of OpenTable and Google. Motley Fool newsletter services have recommended buying shares of Google and OpenTable.