Edible Apple

Nicholas Jackson, writing for The Atlantic, points out that while Google had $225 million in cash as of June 30, they’re still on the hook for over $392 million they owe to merchants for past Groupon deals. Moreover, Jackson points out that Groupon continues to lose money as it makes moves to increase its business. During the second quarter of 2010, for example, the company lost $103 million.

Meanwhile, the company is spending vast amounts of money on advertising and even as they continue to bring in new customers, a recurring problem is that Groupon tends to attract one-time customers. As opposed to a site like Amazon that builds customer loyalty and keeps people coming back time and time again, many Groupon users will buy deals sporadically. In other words, Groupon is struggling to make enough money per new customer to match the money it’s spending to attract those new customers.

Groupon is covering all of its costs by selling more and more coupons overall. The way that the company is set up, Groupon doesn’t have to pay its merchants until 60 days after a deal closes. So, with continued growth, Groupon is bringing in money to pay off old debts, but its debts continue to grow, too. “As of June 30, Groupon had $680 million in current liabilities — bills the company has to pay,” Business Insider’s Henry Blodget pointed out earlier this week. “Meanwhile, Groupon only had $376 million of current assets with which to pay them.” That means Groupon has a large working capital deficit, or more near-term bills than it can cover.

It almost sounds like a pyramid scheme. Paying off old debts with new money coming in. Eventually the spigot has to run dry.

That is of course why Groupon is working hard to set up their IPO as an infusion of cash is almost what the company needs to stay afloat. Not helping matters, however, is the increased competition Groupon faces. From LivingSocial to BuyWithMe, the number of Groupon-style sites is seemingly growing by the day. And again, customers have no loyalty to Groupon or to any deal-based site. Rather, they’ll flock to whatever site offers them the best deals.

Also, and perhaps this is a bit trite, but isn’t there a point of diminishing returns where Groupon effectively runs out of merchants to do business with in certain cities? After all, each city has a finite number of merchants that can attract customer interest. Once Groupon exhausts these options, they either have to push their deals into the boonies or recycle past merchant deals.

As for Groupon’s IPO, the company is aiming to raise upwards of $750 million which would put a valuation of $25 billion on the company.

That seems patently absurd.

You know, not buying Groupon may have been a blessing in disguise for Google.