Time for Layoffs at Groupon, as Market Cap Drops 50% Below Google Offer

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Groupon Inc. (NASDAQ: GRPN) may be the first of the large Web 2.0 companies that has gone public in the past year to lay off workers. At least it should be.

The public corporation’s results pushed its stock to a new all-time low of $6.06, down from a 52-week high of $31.14. Groupon’s market cap has dropped to the point where it is about half of the $6 billion Google (NASDAQ: GOOG) offered for the online coupon company last December.

Groupon’s period of rapid growth has ended. Revenue may have risen 45% in the past quarter to $568.3 million. But net income was a paltry $28 million. Shares outstanding more than doubled to 663 million due to the firm’s initial public offering. Management expects Groupon’s growth rate to decelerate rapidly in the current quarter:

Revenue for the third quarter 2012 is expected to be between $580 million and $620 million, an increase of between 35% and 44% compared with the third quarter 2011.

And, once again, the company forecasts it will barely be profitable.

Usually when Groupon’s costs are criticized, the focus in on its marketing budget, which was $88 million last quarter. But, that was down a great deal from $212 million in the same quarter a year ago. Sales, general and administrative costs rose from $226 million to $300 million over the same period.

Groupon has more than 10,000 employees. Those people likely cost Groupon almost $1 billion a year. Analysts say that merchants have begun to abandon Groupon as a means to draw customers. The company also faces growing competition from rivals such as Amazon.com Inc. (NASDAQ: AMZN), which has the tools to be a full-blown challenger.

Very little has been said about how the most troubled Web 2.0 IPO companies can move up their margins. The least successful corporations among these new ones, which include Groupon and Zynga Inc. (NASDAQ: ZNGA), have lost the argument with Wall St. that their revenue can quickly outgrow their costs. So, costs have to be brought into line with sales expectations. In most corporations, old or new, that means staff cuts.

Douglas A. McIntyre