Groupon (NASDAQ:GRPN) created a stir with its original S-1 filing back in June. The meteoric growth of the company was accompanied by rather large operating losses. To make things more palatable, Groupon invented a new term, "Adjusted Consolidated Segment Operating Income (ACSOI)" to help investors understand its business. Groupon also noted that both gross margin and free cash flow were important indicators for its business.
The company posted revenues of $644m for the three months ending March 2011 and a net operating loss of $117m. More stunning were the number of subscribers (83m), merchants (56,781) and Groupons sold (28m). The company sold almost as many Groupons in the March quarter as it did for the entire year 2010 staggering growth.
However, some analysis of the big headline numbers pointed to some disturbing trends. Revenue per customer seemed to be declining in areas where Groupon was operating for some period of time. At the same time, customer acquisition costs appeared to be going up dramatically. (That's part of the reason the company lost so much money in the March quarter.) (1)
Some investors also noted that insiders had "already sold out" by liquidating shares privately prior to the IPO filing. (2) The combination led to a negative predisposition in the marketplace, which prodded Founder/CEO Andrew Mason to include a letter defending the company's ambitions in the updated S-1 on July 14th.
With so many customers, it was inevitable that more negative case studies would start to pile up. Again, Andrew Mason couldn't resist responding to critics with his own written missive. (3)
The Mason letter does as much damage as good, however, since it paints a picture of a CEO that may not be reassuring. Mason is certainly visionary and aggressive but doesn't yet have the profits or sustained success to pull off a Steve Jobs, Sergey Brin/Larry Page or even a Reed Hastings. So what's left is a rose-tinted rant that includes gems like "spending more than just about any company ever on marketing" and "a rational person would read this stuff and wrongly conclude that we're in trouble."
So where are we now? The company updated its S-1 again with the long Mason letter included, along with comments to "not use the contents to make an investment decision." The revised revenue numbers have cut the figures by quite a bit. For the first six months of 2011, the company posted revenues of $688m. (That compares to the $644m it had previously reported for just the three months ended in March.) Operating losses continue to mount at $204m through June.
Adding to the cloudy picture, Google (NASDAQ:GOOG) is beginning to get some real traction with "Google Offers" and is looking like a serious competitor. Just a few weeks ago, Groupon COO Margo Georgiadis decided to leave Groupon (along with $25m in stock options) to rejoin Google after just 5 months working for Mason.
Amazon (NASDAQ:AMZN) isn't sitting still either and it has massively expanded its Amazon Local service to 40 markets and is seeing a huge ramp in revenues (this, according to recent analysis from Yipit.) Having Amazon and Google executing well in your backyard is not generally good news.
Even with the markets in turmoil, the official word is that the company still hopes to complete an IPO at some point in the future. The filing is still missing final share count and proposed pricing, but with 13 investment banks on the cover (including leads Morgan Stanley, Goldman Sachs and Credit Suisse), there are lots of mouths to feed. If the estimated total share count of 300m is correct, then the company is likely to file at $25-30B valuation range if the typical $9-11 share price is used. The company probably needs at least another year of operations to support that valuation.
We have not performed an IV analysis yet. Most valuation estimates for Groupon so far have been based on a multiple of revenue. This method is worthless unless it's clear that the company will make money and at that point an IV will be more instructive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.