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

It's a long way from the $6 billion price Google (GOOG) was reportedly willing to pay for Groupon at the height of its popularity.

A good portion of Groupon's fallacies are a direct result of the company itself, noted Piper Jaffray analyst Gene Munster. "Since IPO, the Groupon story has largely been a comedy of errors, drawing into question the viability of the daily deal space," Munster wrote in the note. "Our belief is that while the company has done a poor job of articulating fluctuations in the business model, operating in daily deals and the broader local space is a viable business."

Merrill Lynch's Justin Post downgraded the stock to "underperform," mentioning the drastic decline in gross margins versus estimates. Groupon's gross margins for the quarter were 55.7%, sharply below his estimate of 66%. "Despite the positive growth in customers (+23% y/y) and mobile transactions, we are increasingly cautious on Groupon's business model mix shift, which is pressuring GMs and creating more long-term profit uncertainty vs. the eCommerce group," Post wrote in his note.

The local deals business continues to decline around the world, says JPMorgan analyst Doug Anmuth, and the company's International segment is a drag on costs. Anmuth believes that growing profits this year may be difficult to do if costs aren't cut internationally.

It will be increasingly difficult to complete any business model transition and not start to burn through that $1.2 billion cash hoard. If operating cash flows continue to drop as sharply as they did in the fourth quarter, Groupon may need to tap the public markets for equity. Investors looking to bet on a successful turnaround certainly won't need a "Groupon" when buying shares.

And if there is a turnaround, it may very well be without Mason at the helm of the ship.

-- Written by Chris Ciaccia in New York

>Contact by Email.

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