Just How Troubled is Groupon? Analysts Can’t Decide

It’s crunch time for Groupon, and analysts can’t seem to agree on how the company can save itself from extinction.

There’s plenty of reason for gloom. Nearly six months after Groupon’s controversial public offering, shares of the daily deal giant have fallen almost 50 percent over concerns it won’t be able to create long-term profits; yesterday, GRPN was trading near its all-time low of $10.50.

With the company’s lockup expiring on June 1, Groupon could see its current market cap of $6.8 billion (down from nearly $13 billion last November) fall further still.

What to do? Sam Hamadeh, founder of the private company research firm PrivCo in New York, proposes a radical solution. In his view, Groupon should snap up Seamless, a 12-year-old, New York-based online food delivery service; GrubHub, an 8-year-old, Chicago-based online food delivery service; and/or ZocDoc, a 5-year-old, New York-based, Web service for scheduling appointments with doctors. The idea, says Hamadeh, is to move away from daily deals and toward a recurring revenue model.

ZocDoc would be an interesting fit for Groupon, which derives roughly 25 percent of its revenue from health and beauty offerings. Doctors pay ZocDoc $250 a month to get in front of the 800,000 visitors who come each month in search of a physician. Says Hamadeh, Groupon can either “sign up a [medical] office manager to a one-time $99 X-ray and tooth cleaning deal, or sign up that same medical office — with its average of 10 physicians — for $2,500 a month.”

Of course, ZocDoc wouldn’t come cheap, if it’s for sale at all. Hamadeh estimates the company, with revenue last year of roughly $35 million, is worth roughly a billion dollars and would likely seek up to $1.4 billion from an acquirer. (The company, which has raised $95 million, including from Khosla Ventures, Goldman Sachs, and DST Global, was assigned a $700 million valuation during its most recent funding last September.)

Seamless or GrubHub would be more affordable, though there are trade-offs, including thin profit margins. (Both companies take approximately 9 percent of every restaurant order, but they must share a significant amount of their take with credit card companies.) Hamadeh estimates Seamless, backed by Spectrum Equity and Aramark, could fetch around $500 million as an acquisition candidate; GrubHub, which has raised about $85 million from VCs, could demand $400 million.

Still, not everyone thinks Groupon’s salvation lies in accretive acquisitions. Herman Leung, a senior internet analyst at Susquehanna Financial Group (whose trading desk buys and sells Groupon shares based on customer demand), says he believes the “restaurant category” could be interesting, “highly complementary,” and move Groupon “into a service that could make sense, enabling more local commerce opportunities” as opposed to simply daily deals.

But Leung is quick to add that Groupon has “enough initiatives and priorities on its plate right now. I’m not sure a big acquisition wouldn’t cause more disruption, given the control and processes they’re trying to establish in their organization today.”

Lou Kerner, founder of the Social Internet Fund, which invests in social-media companies, also thinks Groupon is already juggling too much. “I find it hard to believe that the best solution is to bolt an acquisition on to a company that is still unformed,” says Kerner, who calls Groupon in “dire need of professional management, both operationally and financially.”

In fact, some already think it’s too late for three-and-a-half-year-old Groupon to meaningfully recover from its rush onto the public market. “In my opinion, the company won’t survive,”says Scott Sweet, a managing partner of IPOboutique.com. “Groupon might have a chance if it didn’t already have more than 10,000 employees and wasn’t run the way that it is.” But with its dual-class stock structure centering power at the top, “nothing is going to change,” Sweet says.

Indeed, Sweet doesn’t make much of the news this week that Groupon is swapping out board members Kevin Efrusy of Accel and Starbucks CEO Howard Schultz for a Deloitte vice chairman and the CFO of American Express — an apparent attempt to address criticism over its accounting practices. (Notably, Schultz didn’t wait for the company’s shareholder meeting next month meeting to bolt, unlike early investor Efrusy, who will remain as a director until then.)

Hamadeh, meanwhile, thinks it’s a step in the right direction but that a whole lot more need happen, and fast.. “Given Groupon’s current death spiral, the company really doesn’t have much choice but to try and walk and chew gum at the same time,” he says. It has “precious little time.”

Groupon image courtesy of Shutterstock.