Editor’s note: This article was first published in July 2013; Groupon’s share gain of more than 70% over the previous six months, Facebook’s more than 1 billion users and the description of how Facebook’s offers feature worked are from that time. This view dates from July 2013 and is kept as a historical record. It is not investment advice.
Even though Groupon shares have gained more than 70% over the last six months, I wouldn’t risk holding a single share of a discount-coupon company in my portfolio. These companies have probably had their innovative moment, but looking beyond the fundamentals, their business models are broken.
Groupon has already had serious trouble turning a profit despite its high revenue. Among tech companies, these are the ones that raise the most doubts for us once we look at what they offer their customers and at their future competition. Groupon’s biggest competitor will be Facebook itself, because businesses can actually get the same result using Facebook’s offers, where they can reach even more users, give end customers even better prices and, on top of that, make a profit.
Until now, if a business wanted to win customers with discount coupons, it had to make a very eye-catching offer with a discount of up to 70%, and of the remaining 30%, the coupon companies kept half. Just yesterday, when I opened Facebook, I came across one of these offers (the screenshot in the original article has not been preserved).
That is the future: small businesses can now launch the same offers with amazing discounts and make a profit, whereas with discount coupons the strategy was not to make money but to get your name known. Bearing in mind that Facebook has more than 1 billion users and lets you run a campaign targeted at users by age and by province, who is going to turn to discount coupons in the future?
If we listen to the advice of some of the great investors, and above all Warren Buffett, to invest in companies that are not easy to compete with, the truth is that for giants like Google and Facebook it is really easy to take over this business, and in fact they are already doing it.
Featured image: Mlnielson91, CC BY-SA 4.0, via Wikimedia Commons.
