Groupon's Negative Rate Of Change Suggests Another Webvan
Based in Chicago, Ill., Groupon - proposed symbol NASDAQ:GRPN -- scheduled a $510 million IPO with a market capitalization of $10.8 billion at a price range mid-point of $17 for Friday, November 4, 2011.
Groupon’s negative rate of change in key metrics suggests that that Groupon is today’s Webvan (1999-2001). Webvan was the largest dot-com flop in history.
RATE OF CHANGE
Many stock market traders pay close attention to the speed at which one variable changes relative to another. Rate of change is the speed at which a variable changes over a specific period of time. It measures momentum.
CONCLUSION
Groupon may be worth a quick flip in the IPO market. However, the analytical results below should give long-term Groupon investors considerable pause.
Rate of change analysis proves that the Groupon high flying rocket is headed down.
Notice the quarterly change in Groupon’s sold is only 1%. Other quarterly changes are –21% for Groupons sold per customer; -17% for subscribers added; -12% for customers added; and -14% for revenue per customer.
Quarterly results | June 2010 | Sept, 2010 | Dec, 2010 | March, 2011 | June 2011 | Sept, 2011 |
Revenues ($mm) | $39 | $82 | $172 | $296 | $393 | $430 |
Rev increase over prior qtr | 110% | 72% | 33% | 9% | ||
RATE OF CHANGE ANALYSIS | ||||||
Qtrly change in Groupons sold | 97% | 73% | 16% | 1% | ||
Qtrly change in Groupons sold per customer | 1% | -1% | -21% | -21% | ||
Qtrly change in subcribers added | 167% | 11% | 0% | -17% | ||
Qtrly change in customers added | 96% | 54% | 7% | -12% | ||
Qtrly change in revenue per customer | 7% | -2% | -9% | -14% | ||
VALUATION
Groupon is trying to value itself by comparing its book value with Linkedin (LNKD) and Pandora (P), all in the range of 20+ book value.
Groupon is also offering a price-to-sales discount relative to LNKD, P and Zillow (Z). Annualizing the most recent quarter, the respective price-to-sales ratios are 6.3, 16.8, 8.4 and 12.5.
Notice, however, that LNKD and Z were both profitable in their last reported quarter.
Valuation Ratios | IPO Mrkt | Price / | Price / | Price / | Price / | % offered |
Annualizing Sept quarter | Cap (mm) | Sales | Earnings | BookValue | TangibleBV | in IPO |
Groupon (GRPN) | $10,761 | 6.3 | -11256 | 23.2 | 43.6 | 5% |
Linkedin (LNKD) June qtr | $8,130 | 16.8 | 451 | 20.5 | 20.8 | |
Pandora (P) July qtr | $2,260 | 8.4 | -314 | 21.7 | 21.7 | |
Zillow (Z) June qtr | $800 | 12.5 | 125 | 9.4 | 9.4 | |
Amazon (AMZN) June qtr | $90,060 | 2.3 | 118 | 11.6 | 11.6 | |
Microsoft (MSFT) Sept qtr | $223,680 | 3.2 | 10 | 3.8 | 117.2 |
More Groupon Valuation metrics here
COMPETITION
Entry barriers are low. Current major competitors include Google (GOOG) and Amazon (AMZN). And if the daily deal market had sustainable growth, which we believe it doesn't, then even Microsoft (MSFT) might be tempted.
FREE CASH FLOW & WORKING CAPITAL DEFICIT
Groupon touts its free cash flow, which happens because GRPN collects cash from retail customers and holds the money before paying retailers. In the U.S. GRPN pays after 60 days.
In international markets Groupon doesn’t pay the retailer until the coupon is ‘cashed’ at the retail establishment: Groupon ‘pockets’ unused coupons – no wonder cash flow is positive.
However, going into the IPO Groupon has a working capital deficit of over $300 million. That’s not a healthy way to run a business.
INVESTOR CASH OUTS
Going into the IPO GRPN has a negative net worth of $15 million. No wonder GRPN insiders have already cashed out of almost $1 billion.
INEXPERIENCED CEO RED FLAGS
No Accounting Experience
GRPN CEO Andrew Mason, age 30, was a music major in college and apparently had no accounting classes. Real world lack of experience showed up when the SEC pushed back on GRPN’s creative accounting approach and required the company to restate its financial results – always a very bad sign.
Professional Managers Wanted by Investors
When a company grows fast, professional investors always want to bring in someone with growth experience, especially with IPO experience. Working with Andrew Mason is apparently hard to impossible for professional managers.
For example, GRPN’s president resigned last Spring and the newly hired COO, former Google sales vice president Margo Georgiadis, resigned about same time the SEC lowered the boom on GRPN and required financials to be restated – yes, there’s probably a connection there.
In addition, after only two months GRPN’s public relations chief quit in August.
WE”VE NEVER LIKED GROUPON
Will Groupon Ever Be Able To Complete Its IPO?
Groupon: No Sustaining Competitive Advantage
Groupon: The Good and the Bad
USE OF PROCEEDS
GRPN expects to net $479 at price point mid-range of $17. The money is allocated to working capital and general corporate purposes. As a result of the IPO GRPN will finally have positive working capital, at least for the time being.
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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