No way! Yet another dot com racing for the IPO train. I am getting the deja vu feeling. Maybe this time it’s different. Or is it?
In case you haven’t already heard, Groupon is making plans to IPO in the spring at a $15 billion valuation. Groupon’s business model offers coupons to groups which “tip” (minimum amount of purchasers) a product. Groupon has focused much of 2009/2010 multiplying its revenue stream by offering the deals not only in every major city in the US, but also around the world. First mover advantage and launching during a deep recession were among the main reasons why the company has seen initial success. Now here are the problems.
- Easy to replicate business model. So easy, that everyone’s doing it. Since Groupon launched in 2008, hundreds (if not thousands) of Groupon-like sites unleashed their own versions of “Groupon” to get a piece of the pie. LivingSocial is perhaps the most popular one on the list.
- Unhappy customers. Are businesses happy with Groupon? After discussing this with some of the business owners in the Atlanta area, the answer is not always. The Groupon model works extremely well for struggling or new companies looking to add foot traffic. Groupon offers the companies a huge revenue hit by heavy discounting and then takes half of that revenue in exchange for coupon-addicted customers! Ouch. A large portion of the customers do not return as they’re more interested in the Groupon than the restaurant offering the deal. Many of the companies have also turned to Groupon-like sites for better terms.
- Questionable valuation. The company was valued at $1.35 billion in April 2010. A year later they’re IPOing at $15 billion? That’s a 1100% annual return for investor Digital Sky Technologies [recently received headlines for sharing the $500 million investment in Facebook with Goldman Sachs (NYSE:GS)]. Is this IPO offering a valuable product to investors or an exit strategy to get out at “Sky” high prices?
- Recession is over. The economy is projected to improve in the next few years. Are businesses going to be happy sharing enormous portions of revenues with a 30-year-old kid, Andrew Mason, when customer traffic will return to normal levels?
- Deals getting worse. The Groupon deals have progressively gotten worse (OK so this one is a personal opinion!) I used Groupon in 2009 and the early part of 2010 when it first became very popular. At this point, I haven’t seen anything practical or useful. This makes sense. With the growing competition and most companies recovering post-recession, it’s the not-so-attractive companies that continue to rely on coupons to attract customers.
Allthingsd reported that Groupon recorded $2 billion of annual revenues last year. Bloomberg reported the figure at $500 million. The difference might be in what you’d consider “revenue” for this company since Groupon shares its revenues with its clients (pass-through-revenues). In any case, at $500 million, 30% operating margins, and a 20% tax hit, the company would be recording a bottom-line figure of about $120 million. The $15 billion valuation is then 125x earnings [Apple (NASDAQ:AAPL) is 23x] for an unsustainable company that offers an easy to replicate model. Don’t forget, Google (NASDAQ:GOOG) didn’t want to pay more than $6 billion for the company and a month later they’re valued at $15 billion! I’d trust Google.
My opinion: Groupon’s early investors have drawn a lot of recent attention to the company’s unique financial model, poor growth projections, and sustainability concerns. This is a pure exit strategy play to cash in quickly on an extremely risky hold. A lot of questions are still unanswered about this company and will not be prior to the IPO! I hope the company plans on offering a Groupon deal on their stock price when nobody’s going for that Ask.
Disclosure: I am long AAPL.