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Stock Strategist

Before Buying Groupon's (IPO) Deal, Read Our Fine Print

Barring significant innovation, we expect Groupon's lack of a durable competitive advantage to become more obvious over the next two years.

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Heavy spending and rapid expansion has helped Groupon establish a market for "daily deals" and email promotions for local businesses. With a database of more than 115 million email subscribers, Groupon (GRPN) has built a large audience to market deep discounts ("Groupons") offered by local merchants. As the largest provider of daily deals, Groupon's growth in customers, merchants, subscribers, and revenue has been nothing short of stratospheric. The company has not been able to achieve profitability, however, as expense growth continues to outpace revenue gains. Below we outline why we believe IPO investors considering Groupon face a nontrivial risk of permanent capital impairment.

Primarily, Groupon's business presents investors with three critical challenges.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.