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Summary

  • Established player in a growing market for digital coupons.
  • Growth is accelerating, while the company is close to break-even.
  • Valuation is too rich for me.

Coupons.com (NYSE:COUP) operates a digital promotion platform connecting retailers with customers by delivering digital coupons, codes and advertising.

Investors in Coupons.com have seen spectacular opening day returns, in what can be called a hugely successful offering. Despite a sizable correction from the highs which have been set on the first day, investors are still very pleased with their investment. While the company is showing accelerating growth and is on the verge of profitability, I cannot justify the current valuation.

The Public Offering

Coupons.com connects some 2,000 brands held by 700 companies with consumers across the United States. The company delivers coupons, digital coupons and codes to consumers through 30,000 third-party websites.

Coupons.com sold 10.5 million shares for $16 apiece, raising some $168 million in gross proceeds. Demand was very strong for the offering, with underwriters and the firm initially aiming to sell shares in a $12-$14 price range. Some 14% of the shares outstanding were offered in the public offering.

Coupons.com has seen a spectacular debut, with shares more than doubling on their opening day as they traded as high as $33 per share. Ever since, shares have settled to current levels around $19 per share, suggesting a $1.4 billion valuation of Coupon.com's equity.

The major banks that brought the company public were Goldman Sachs, RBC Capital Markets, Allen & Company and Bank of America/Merrill Lynch.

Valuation

Coupons.com offers coupons from some of the best-known brands in the U.S., including Campbell Soup (NYSE:CPB), Dr. Pepper Snapple (NYSE:DPS), Dole Food (NYSE:DOLE), Fresh Del Monte Produce (NYSE:FDP) and brands from giants like Procter & Gamble (NYSE:PG), as well as Unilever (NYSE:UN). The company has been around for a while, and was founded back in 1998. It employs around 500 workers at the moment.

Coupons.com generated revenues on some 940 million transactions in the first three quarters of 2013. As a matter of fact, it distributed an unprecedented 305 billion coupons in 2012, of which 2.9 billion have been redeemed, or little less than 1%. This allowed customers to save $3.7 billion that year. The company generates revenues based on issued or redeemed coupons, as agreed with retailers.

In 2012, Coupons.com generated revenues of $112.1 million, which is up by 22.8% on the year before. This came at a heavy cost, as losses nearly tripled towards $59.2 million.

Growth accelerated in the first nine months of 2013, as revenues were up by 51.0% to $115.3 million. The company made aggressive cost cuts and managed to narrow losses from $50.1 million to $12.8 million in the period.

Coupons.com operated with $43 million in cash ahead of the public offering, while holding $23 million in debt. With all gross proceeds going to the company, Coupons.com will hold a comfortable net cash position of roughly $175 million.

This implies that operating assets are valued around $1.2 billion. Assuming revenues for 2013 could come in around $165 million, operating assets are valued at roughly 7-8 times annual earnings. Based on historical trends, Coupons.com could generate profits in the very important fourth-quarter holiday season.

Investment Thesis

As noted above, Coupons.com's public offering has been hugely successful. Shares were priced some 23.1% above the midpoint of the preliminary offering range, and even doubled on their opening day. Shares have seen a correction ever since, but current levels around $19 per share still imply big gains for first-day investors.

While coupons appear to be old-fashioned, consumers still love their coupons, and the product has made the transition to the online and digital environment well. Market research company eMarketer estimates that 97 million U.S. customers will use digital coupons.

Coupons.com has strength, offering coupons through multiple channels, while supplying coupons from a broad range of top-tier clients to customers across the nation. Flexibility of the platform, including integration with point-of-sale technology of retailers, is an example of another strength.

Losses and growth are a concern, although trends have improved a lot in recent quarters. Note that in the third quarter of last year, revenues rose by 68.2% on an annual basis to $27.6 million as losses narrowed from $16.6 million to just $1.6 million. Competition is an obvious factor as well. RetailMeNot (NASDAQ:SALE) already went public in the summer of last year, and the company is nearly twice as big in terms of revenues.

On average, Coupons.com receives little less than four cents on every coupon dollar being used by consumers. Given the huge transaction numbers, this does add up significantly for the company.

I am encouraged by the recent revenue and earnings trends, although Coupons.com has a lot to prove to justify a valuation of close to one and a half billion. I remain on the sidelines, awaiting the first quarterly earnings release as a public company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Coupons.com - No Coupons Are Offered To Buy Shares At A Discount