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The Brode Report
The Brode Report  |  July 2012

David Brode profile  


With the Olympics starting again, Iím pulling out the analysis I did for the 2010 Winter Games. While the U.S. or China may win lots of medals, thatís in part due to the fact that we have lots of population and are rich enough so people can train. Check out the sidebar for the summary and Iíll update this after the games in London have ended.

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Groupon Ė Dropping Like a Rock

As of 7/24, GRPN has a market cap of $4.7B. So if we look over the period from December 2010 when Google offered $6.6B, Groupon has returned (19%) in IRR as it has fallen nearly 30%. From the real excitement of people quoting $30B valuations in Q1 11, GRPN is down nearly 85%, and itís down over 70% from the IPO price last November.

What is driving this? First, there are new business model concerns. Once upon a time when you bought a Groupon for $10 that gave you $20 at a restaurant, that money was spent. Groupon paid the merchants over a fixed schedule and thus had negative working capital. Now, however, Groupon has branched out into more expensive deals for travel and medical procedures. In more cases now, refunds are allowed. This is where Groupon got into trouble with its Q4 2011 reporting. Auditors found that Groupon had under-estimated the reserves required for refunds and thus overstated earnings. The impact was to neatly swing from making $15M to losing $15M. Given Grouponís past accounting woes with showing gross vs. net revenues and using a non-standard profit measure (remember ACSOI?), itís starting to remind me of an old Dilbert cartoon.

A second business model concern is more fundamental. One analyst wrote:

Well, for starters, itís not a coupon company nor a marketing company. At its core, Grouponís U.S. business is a receivables factoring businessÖ. They give loans to small businesses at a very steep rate (the price of the discount plus Grouponís commission)Ö.. Groupon is essentially a sub-prime lender that does zero risk assessment. And as word continues to spread about what a terrible deal running a Groupon is for many categories of businesses, the ones that will choose to run Groupons are the ones that are the most desperate. For U.S. based businesses, the only time I can definitely recommend running a Groupon is if it is otherwise going to go out of business.

This is a fundamentally different description of Grouponís business. As described here, a business desperate for cash flow runs a Groupon deal. Instead of collecting their normal $20 on a service, they collect $5 (the deal sells for $10, and Groupon keeps half). Yes, some customers wonít use the coupon, but itís hard to make money on ľ of the revenue. As Groupon hasnít demonstrated that they create repeat customers or that itís likely businesses can upsell customers, marginal businesses are collecting money upfront and building a large liability. If these companies fail, will customers expect refunds from Groupon?

On the other hand, Yipit reports that more of Grouponís business is coming from repeat merchants. If thatís true, itís a good sign for sustainability.

However, as predicted, competition has heated up. Weíve long held that Groupon has no sustainable competitive advantage, and now the sector has moved past the hundreds of copycat and niche sites and now the daily deals space has attracted major players. Google Offers is steadily rolling out.

Amazon is hitting the space hard. In addition to their partnership with Living Social, Amazon has its own daily deals. Theyíve even added daily deals to the Woot.com site, now owned by Amazon. I expect weíll see a rapid tapering of subscriber growth for Groupon and eventually margin reduction as the industry players compete for business deal providers.

Overall, there arenít a lot of happy investors when your stock chart looks like this:

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Reprinted from the
London Evening Standard

Britainís Olympic size failure

What was the best-performing country at the Winter Olympics?

While Canada may claim it was them wot won it with more golds or the US with the greatest number of medals, the answer is Norway.

David Brode, principal of The Brode Group, the corporate finance advisory house based in Boulder, Colorado, has been running the final medals tally and the countriesí relative economic strengths through his calculator. It shows that Norway scored 109 points per trillion dollars of GDP. By the same method, Canada came only fifth and the US was way down, with 48 points per trillion dollars. But none was as inefficient as the UK.

We managed just 1.1 points per trillion dollars of GDP, the worst performance of any medal-winning nation.
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