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Groupon: A Train Wreck in Public Sight (Update 1)

Stocks in this article: GRPN AMZN

Updated from 9:59 a.m. EST to provide additional analyst comments in the ninth paragraph.

NEW YORK ( TheStreet) -- The daily deals category as we knew it is dead, and Groupon's (GRPN) acknowledgement of this may cost CEO Andrew Mason his job.

The Chicago-based online commerce company reported fourth quarter results yesterday that were much worse than Wall Street expected, with the company in the midst of a business model pivot. Groupon is moving from the once-lucrative model of daily deals into more direct e-commerce sales, bringing it into competition with powerhouses Amazon (AMZN) and, to a lesser extent, eBay (EBAY).

So far, the shift in model looks like a train wreck, with Groupon's operating and free cash flows plunging year over year. Operating cash flows fell 61% year-over-year to $65.7 million, compared to $169.7 million in the fourth quarter of 2011. The decline in free cash flow was even worse, plunging 83% year-over-year to $25.7 million. Despite the sharp drops, Groupon still had $1.2 billion in net cash and cash equivalents at the end of 2012.

Wells Fargo analyst Jason Maynard is a Groupon skeptic. " W e are not convinced that unloading overstock goods at very low margins is a good strategy," Maynard wrote in a research note. "We believe that this diminishes the brand, and could drive the more profitable deals to other premium branded sites. More importantly, we think this puts Groupon on a collision course with Amazon."

Daily deals once excited Wall Street because of their high margins, but low barriers to entry invited a raft of competition from related businesses, which forced a re-rating of Groupon and the industry as a whole. Consumer reviews site Yelp (YELP) and restaurant reservation service Open Table (OPEN) were among those who jumped in, most to little success. The effect on valuations has already forced Amazon to take a write down on its investment in Groupon rival Living Social.

Mason, 33, has been at the helm of Groupon since founding the company in 2008, but with the company in transition he may no longer be the right man for the job.

Hudson Square Research analyst Dan Ernst suggested a change by the board away from Mason could be positive for the company. "Our view might be more negative except that A) it appears the new COO has near term plans to significantly cut costs overseas, and B) the magnitude of current issues could prompt the board to make changes, that would likely serve as a positive catalyst for the stock."

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