This bug was fixed in the package cloud-init -
0.7.8-68-gca3ae67-0ubuntu1

---------------
cloud-init (0.7.8-68-gca3ae67-0ubuntu1) zesty; urgency=medium

  * New upstream snapshot.
    - user-groups: fix bug when groups was provided as string and had spaces
      (LP: #1354694)

 -- Scott Moser <[email protected]>  Mon, 19 Dec 2016 12:35:13 -0500

** Changed in: cloud-init (Ubuntu)
       Status: Confirmed => Fix Released

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https://bugs.launchpad.net/bugs/1354694

Title:
  useradd crashes if group list contains whitespace on Fedora

Status in cloud-init:
  Confirmed
Status in cloud-init package in Ubuntu:
  Fix Released
Status in cloud-init source package in Xenial:
  Confirmed
Status in cloud-init source package in Yakkety:
  Confirmed

Bug description:
  See downstream: https://bugzilla.redhat.com/show_bug.cgi?id=1126365

To manage notifications about this bug go to:
https://bugs.launchpad.net/cloud-init/+bug/1354694/+subscriptions

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