Will Groupon Ever Be Able To Complete Its IPO?
The air is fast leaking out of the daily deal coupon business/balloon, with obvious negative consequences for Groupon’s potential IPO valuation.
SUMMARY -- The daily deal market itself appears to be shrinking (at least the 'growth' rate is shrinking) based on what Yelp, Facebook, Living Social and Groupon (NASDAQ:GRPN) are jointly experiencing. Groupon is currently running at a $408 million rate of yearly losses, margins are declining, usage per customer is declining. Profitablility is not in sight now, if ever. In short, it's not clear that Groupon's business model is sustainable on a longer term basis.
Which begs the question, why would rational investors even be interested in an IPO from Groupon?
The answer is that it will probably happen at some price because investment bankers are incentivized to complete the deal no matter what. Plus, out of Groupon's large customer base there may be enough investors who are not able or willing to evaluate comparative market valuations in the context of growth drivers, competition, and other rational metrics.
For example:
. Yelp Follows Facebook in Scaling Back Daily-Deal Service
. Groupon, LivingSocial Unique Visitors Fall From June Peak
OVERALL GROSS MARGIN DECLINES -- GRPN’s gross margin in the June quarter compared to the March quarter declined 8% to 38.8%, which is a low gross margin for a supposedly internet-based business. Low gross margin companies in general are not afforded high stock market multiples. Amazon (AMZN) is an exception.
COOKING THE BOOKS -- Groupon showed a loss of 12% or $102.7 million, on revenue of $868 million for the June 2011 quarter. The loss held even compared to the March quarter only because Groupon cut ‘marketing expenses’ to 13%, to $176 million in the June quarter down from $202 million in the March quarter.
In some circles that's called "cooking the books."
STRUCTURAL PROBLEMS -- Groupon’s structural problems include
. Very high cost of customer acquisition
. Declining gross margins per coupon
. Declining number of Groupon’s sold per customer.
Where’s the silver lining? There is none.
RATE OF GROWTH ANALYSIS | Dec, 2010 | March, 2011 | June, 2011 | |
Revenue% increase | ||||
over prior quarter | 115% | 62% | 36% | |
Subs added as a % of total subscriptions | 49% | 43% | 32% | |
GROSS PROFIT PER CUSTOMER | $16.97 | $17.08 | $14.83 | |
GROUPONS SOLD PER CUSTOMER | 1.80 | 1.78 | 1.41 | |
Source: Groupon’s August 10, 2011 S-1 page 57
Full Disclosure -- we have never liked Groupon.
Groupon: no sustaining cometitive advantage
Groupon: the good & the bad
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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