Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

RetailMeNot (SALE) made its public debut on Friday, July 19. Shares of the world's largest digital coupon marketplace ended their first day with spectacular gains of 31.9% at $27.70 per share.

After these spectacular gains, the valuation is a bit too rich for me. The current valuation of $1.4 billion, or almost 10 times last year's revenues, is a bit too high for my taste. Especially as the online coupon marketplace has relied heavily on acquisition to drive revenue growth in recent years.

The Public Offering

RetailMeNot operates the world's largest coupon marketplace according to the company itself. The company features digital coupons from more than 60,000 retailers and brands, receiving over 450 million visits to its websites per annum. The company is known from its brands RetailMeNot and VoucherCodes.

Its marketplace now features over 500,000 digital coupons per month used across a range of product categories and websites. Coupons can be redeemed both online and in-store.

RetailMeNot sold 9.1 million shares for $21 apiece, thereby raising $191 million. Half of the shares were sold by selling shareholders, resulting in gross proceeds for the company of approximately $95 million.

The public offering values the equity of the firm at $1.05 billion. The offering took place at the midpoint of the preliminary $20-$22 offer range. Some 18% of the total shares outstanding were offered in the public offering. At Friday's closing price of $27.70 per share, the firm is valued around $1.39 billion.

The major banks that brought the company public were Morgan Stanley, Goldman Sachs, Credit Suisse, Jefferies and Stifel, among others.

Valuation

RetailMeNot is known from a range of digital coupon marketplaces. In recent years it saw an increase in consumer traffic for digital coupons. It enters into pay-for-performance models with retailers in order to end up with a mutually beneficial relationship. The company receives a commission on each sale.

Crucial for the company is to expand its marketplaces, which is needed to drive traffic and improve the quality of coupons offerings. Since 2009 the company has rapidly grown its operations, partially fueled by overseas acquisitions.

For the year of 2012, RetailMeNot generated annual revenues of $144.7 million, up 80% on the year before. Net income rose by 53% to $26.0 million. After paying out preferred stock dividends the company broke even over the past year. This compares to a loss of almost $48 million in the year before.

For the first quarter of 2013, the company generated revenues of $40.6 million, up 37% on the year before. Net income before payments on preferred stock rose by 12% to $7.0 million. Again, the company broke even after paying out preferred stock dividends.

RetailMeNot ended its first quarter of the year with $112.3 million in cash and equivalents. Including the gross proceeds of $95 million from the public offering and expected payouts to preferred stock, this implies that current cash balances will stand around $150 million at the moment. The company has $355 million in convertible preferred stock outstanding.

As such operating assets of the firm are valued at $1.39 billion. This values the company's assets at 9.6 times 2012's annual revenues.

Investment Thesis

As noted above, the offering of RetailMeNot has been a huge success. While shares were offered at the midpoint of the preliminary offering range, they saw big opening-day gains of almost 32%.

The underlying results appear healthy as well. RetailMeNot's websites recorded 464 million visits for 2012, which is up 33% on the year before. Note that some growth has been directly tied to acquisitions which the company has made. The company is succeeding to monetize these visits, with average revenue per visit increasing 35% to $0.31.

Still the company is heavily focused on its flagship RetailMeNot.com website, which generated 80% of total revenues. U.S. revenues account for roughly 85% of total revenues as activities in the U.K., France, Germany and the Netherlands still have to pick up pace.

As we have seen before, there are low entry barriers in this industry, which led to terrible price action of competitor Groupon (GRPN) following its public offering. Other possible competitors include Google (GOOG), which through its investment arm owns 5% of the shares, and possibly Facebook (FB). Other risk besides competition includes a heavy reliance on search engines and changes in their algorithms. Especially the reliance on Google poses a threat.

The string of acquisitions could furthermore lead to asset impairments and the shift towards mobile Internet usage presents its own set of challenges as well.

Another worrying sign is the 20% drop in quarterly revenues compared with the fourth quarter of 2012, which saw a boost because of holiday sales. First-quarter revenues for 2012 fell by merely 12% compared to the quarter before on the back of this seasonality.

Overall the company is rapidly growing, and even more important it is profitable. Yet profits largely go towards preferred stockholders as profit growth attributable to common shareholders is stagnating despite the solid increases in revenues. The company furthermore earmarked roughly $52 million in public offering proceeds to be paid out to preferred stockholders.

Crucial will be the evolution of competition as the company hardly has a shot if the likes of Google or other major tech moguls become serious about this market. For now the revenue growth is solid, but is driven by acquisitions and is already declining. Valued at 10 times annual earnings, and with earnings growth attributable to shareholders stagnating around the break-even level, I remain on the sidelines on a $1.4 billion valuation.

Source: RetailMeNot - No Coupons Offered For This Public Offering