[vsl2]

I haven't felt this strongly about shorting a stock long-term in a long time. But I don't know how long the short-term irrational exuberance is going to last - will it wipe out my investment before the stock crashes down?

I haven't seen one pro-Groupon (or general daily deals) analyses that says anything different than "it gets people in the door and generates buzz" which I think is nothing more than fuzzy PR talk since you very rarely hear of businesses that actually received long-term boosts. You read about how businesses don't benefit because mostly cheap non-returning users use Groupon deals (i.e. very few return customers) and it cheapens the businesses' full price pricing power to those who know of the Groupon (i.e. "since X was a Groupon in the past, I won't go there until there is a Groupon again").

[smackfu]

I've been burned by this before, especially by the margin requirements for a short-sale. It doesn't matter how confident you are a stock will crash, because if it keeps going up, eventually you will either need to sell at a big loss or add more money to keep up. And it's very tempting to short even more as it continues to go up, since you'll make even more when it crashes! And then you run out of money and are screwed.

In general, it's not a good idea to start from "this stock is priced illogically" and then apply logic to it.

[bwhite]

In a couple weeks, options will be available on the stock and you can buy puts. The upside isn't as good but the downside is capped instead of unlimited.

[ScottBurson]

"Markets can stay irrational longer than you can stay solvent." -- Keynes

[unfletch]

I agree with the sentiment, but the quote is misattributed. It was probably first said by Gary Shilling, a writer for Forbes, in 1993: http://quoteinvestigator.com/2011/08/09/remain-solvent/

[ScottBurson]

Wow. Funny how these things take on a life of their own. A lot of people now think Keynes said that.

[ww520]

Wait until the lockout period for the employee options expires, like in 6 months, then short it hard. Do it like 2 months beforehand because everyone else is thinking the same thing.

[comedian]

put option terms only last for 3-9 months. you can use LEAPS which are long-term option contracts with a 2+ year expiration.

[ippisl]

One rice university study says that 70% of health spa's , yoga studios and similar businesses see repeat customers. Since it doesn't cost a yoga studio to add a person to a lesson(up to a point), customer cheapness is less an issue and maybe daily deals are a new effective way to better scale certain kind of businesses.

[sunchild]

Doesn't it concern you that Groupon works best for services that no one needs? I would say that in times of austerity, yoga, helicopter rides, health spas, parachuting, etc. are the first to go.

[raganwald]

First, I agree that this is an insightful observation, and it certainly applies to conventional suppliers. For example, if demand for yoga classes drops, the demand for professional-grade yoga mats will drop.

But a businesses like an advertising agency or coupon distributor is not a conventional supplier: It exists to create demand for things people don’t think they need. In times of austerity, it’s true that “organic” demand drops. But that can increase demand for businesses that create demand out of thin air.

When the class is full, nobody needs to distribute a coupon. But when the class is half-empty... Perhaps Groupon will get the call. Perhaps.

I am not endorsing Groupon, just trying to point out that since they aren’t a yoga business or a conventional supplier to a yoga business but a business that throws a lifeline to a yoga business, their economics may not exactly track yoga business economics.

[potatolicious]

There's another factor though - in a down economy luxury goods and services tend to get squeezed. Prices will drop, margins will decrease.

What the Groupon model wants to do is throw a 50% discount on top of that. When times are good, margins on luxury services may be enough to let this slide as a marketing expense. What about when times are bad?

[raganwald]

Makes sense when you’re selling bikes... a 50% off coupon only makes sense if your margins are 50% to begin with. But when you’re renting bikes, you have already sunk the cost of the bikes and are now looking to extract value from excess capacity. So the economics are different.

Or getting back to Yoga, it’s hard to offer 50% off your price for Lululemon clothes if you’re already discounting your prices to match the economy. But if you have a Yopga studio, your rent has already been paid. If you only have 10 people booked for a class that can hold 20, a coupon deal for ten more people may seem attractive.

Especially if Groupon fronted you the money for the attendees out of the capital they’re raised.

(Still not endorsing Groupon the company, just trying to be “fair and balanced” and make sure we’re looking at all of the factors in play.)

[Jage]

Times are bad....

And yet Groupon obviously is doing alright.

Using your logic, shouldn't one be bullish on Groupon considering it'll make MORE money once the economy improves ? Using your logic of course....

My real problem with all this negative talk is that it's become a fad.

Groupon is gonna crash! It's a ponzi scheme! It's not worth anything!

Since so much sentiment is against Groupon, I tend to favor it more. Don't get me wrong, they've had a lot of problems, but it's definitely not the total disaster so many make it out to be.

Don't forget that contempt and fear are just as irrational as exuberance and greed.

[sunchild]

It might be a fad on the day of the IPO, but if you break Groupon's business model down to its essential elements, it requires a huge number of leaps of faith to rationalize its competitive advantage and revenue potential. Goldman Sachs says they predict 40% growth year over year for the next two years. That sounds extremely fishy to me, given the already-dubious value of the service, the low technical and financial barriers to entry, the lack of loyalty from merchants and consumers alike, the allegations of crooked books, the early cash out for founders and investors, etc., etc. Too rich for my blood, I guess.

[pbreit]

> Doesn't it concern you that Groupon works best for services that no one needs?

Even if that were the case, not in the slightest. Massive businesses are built on items that you or someone do not perceive to be needed.

But Groupon also works in austere times both because people are looking for deals and businesses are looking for inexpensive or free marketing.

[alttab]

A large portion of the US economy is based on consumerism, of which many would agree is completely unnecessary

[sunchild]

50% of proceeds is not cheap for businesses. Discounts off MSRP is often not a bargain for consumers.

[chollida1]

> haven't felt this strongly about shorting a stock long-term in a long time. But I don't know how long the short-term irrational exuberance is going to last - will it wipe out my investment before the stock crashes down?

I'd be more worried about the borrowing costs killing you.

Small float, check Hedgies got their pop and exit, check Lots of short interest, check

it's going to cost you dearly to short.

[JimboOmega]

E*Trade won't let me short it, at the moment anyway, because they say they can't borrow shares for it.

I haven't felt this strongly about a short in a long time, either.

[gyardley]

Of course they can't, the float is teeny.

Eventually you'll be able to buy put options, but you're going to pay a huge premium because of that float - there's a real risk the clearing firm will force your market-maker to buy stock, which has to be priced into the cost of the put.

Buying options is sort of like gambling on a sports team. When the sentiment's one-sided, the odds naturally get adjusted. You'll only make a bit of money shorting Groupon if you're right, but you'll still lose everything if you're wrong.

If you absolutely must do this, at least buy a put spread to hedge your risk at a bit.

[brador]

Short term exhuberence or organised pump and dump? We've seen it before with the tech IPOs.

[snampall]

It has lockup period of 180 days so that the insiders and the major shareholders can't dump the stock immediately..

http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...

[gojomo]

So let's check back on May 2, 2012!