Some question Groupon's value after losses disclosed in IPO
By Lorene Yue and Paul Merrion and John Pletz
June 03, 2011
(Crain's) — Groupon Inc.'s IPO offers little reassurance to analysts who are skeptical about the online coupon provider's financial viability.
Its top-line growth is nothing short of phenomenal. Chicago-based Groupon generated $94,000 in revenue in 2008. Two years later, it pulled down $713.4 million, according to a prospectus filed yesterday with the Securities and Exchange Commission. In the first quarter of this year alone, it took in $644.1 million in revenue.
Meanwhile, however, the company lost nearly $390 million, excluding acquisition and other costs, in 2010 and another $103 million for the first three months this year. Last year's total loss was $413.4 million, with its cumulative loss coming to $603.8 million.
The document was the first step in the company's process of going public and stated that Groupon planned to raise up to $750 million in the IPO. Groupon has raised more than $1.1 billion from private investors.
"The numbers are like dropping a rock in a very calm pond," said David Menlow, founder and president of IPOfinancial.com in Milburn, N. J.
Groupon says it was profitable in first-quarter 2010 before deciding to pursue an aggressive marketing campaign to expand in the U.S. and overseas, resulting in a first-quarter loss this year. Its aim: To remain the industry leader amid rising competition from a plethora of small-time copycats to the likes of Google Inc. and Amazon.com-based LivingSocial.com.
"I didn't think Groupon was going to have the revenue push it did," Mr. Menlow said. "I also didn't expect the losses to be such a high percent of revenue."
“They spent a ton of money on a heady growth rate and we worry about that,” said Bill Buhr, IPO strategist at Chicago investment research firm Morningstar Inc. “At some point growth slows down and your financials are upside down.”
Despite the heavy losses, Mr. Menlow believes that "investors don't need to be sold" on buying Groupon shares.
Lou Kerner, a digital-media analyst with New York-based Wedbush Securities, also predicts that Groupon will have no trouble finding investors.
“I think there will be a lot of demand," he said. "You're getting unparalleled growth with Groupon.” As for its losses, he notes that Groupon is spending heavily now to acquire customers it thinks will be profitable over time.
The marketing push is paying off in subscriptions to its daily-deal emails. Subscribers jumped to 83.1 million in the first quarter from 3.4 million a year earlier, while the number of bargains surged to 28.1 million from 1.8 million.
But Mr. Buhr worries that as soon as Groupon stops its costly marketing efforts, subscribers will defect to other outfits. “What people are loyal to is the deal and the price, not the company that provided it,” he said.
“What was scary to me was the extent of that marketing expense,” A.B. Mendez, a research analyst at GreenCrest Capital Management LLC in New York, told Bloomberg News. “It's not yet clear what their longer-term margins will be or when they will be able to get to consistent profitability.”
Groupon announced plans to go public just two weeks after LinkedIn Corp., another social media darling, saw its stock almost triple from its $45 offering price in its first day of trading. LinkedIn's shares have eased off since then, closing at $78.63 on Thursday. That's still roughly 37 times revenues per share. (With no earnings, there is no price-earnings ratio to use as a benchmark.)
If the market values Groupon more conservatively at 20 to 30 times its revenues last year, it could be worth roughly $14 billion to $21 billion “whether it makes sense or not,” said Mr. Buhr. “To us it doesn't.”
The appetite for investing in Internet-based service companies has yet to be whetted despite the February IPO for Pandora Media Inc. and LinkedIn's May offering. Pandora, an online music service, has priced its shares between $7 and $9. Pandora isn't trading yet.
Groupon's filing did not offering pricing details or the number of shares that would be issued. The $750 million figure also appears to be a placeholder for a sum that will be determined later when the company prices its offering. Groupon did, however, state that it will seek the ticker symbol GRPN.
The filing also details ownership of the fast-growing company, which will use a two-class stock structure to give founders Andrew Mason, Eric Lefkofsky and Brad Keywell control of Groupon even after its stock becomes publicly traded.
Mr. Lefkofsky, who bankrolled Groupon founder and CEO Mr. Mason with $1 million, owns 21.6% of Class A stock and 41.7% of Class B shares. His longtime business partner, Mr. Keywell, owns 6.9% of Class A shares and 16.7% of Class B stock.
Mr. Mason owns 7.7% of the Class A shares and 41.7% of Class B shares. The 30-year-old CEO, who dropped out of the University of Chicago's public policy graduate school to launch Groupon, borrowed $144,000 from the company to buy 1.8 million shares of stock.
According to the filing, Mr. Mason's salary was just $180,000 last year, but he volunteered to reduce his salary this year to $575.
But the company has had to spend up to attract top-flight talent as it prepares to go public. President and Chief Operating Officer Margo Georgiadis recently was hired from Google at a salary of $500,000. She also received 1.1 million shares of restricted stock.
Chief Financial Officer Jason Child, brought in from Amazon.com, is paid $350,000 and received $9.4 million in stock. Rob Solomon, an ex-Yahoo executive who is leaving as president and chief operating officer this summer, had an annual salary of $350,000 and received stock options valued at $5.1 million.
Groupon, which got its start off a previous website called the Point, has become one of the fastest-growing companies in the nation. The firm, which has more than 7,000 employees and operates around the world, offers its subscribers discounted deals to retailers, restaurants and services.
The company has sold more than 70 million Groupons since its founding.
"If you're thinking about investing, hopefully it's because, like me, you believe that Groupon is better positioned than any company in history to reshape local commerce," Mr. Mason wrote in the company's prospectus. "The speed of our growth reflects the enormous opportunity before us to create the more efficient local marketplace. As with any business in a 30-month-old industry, the path to success will have twists and turns, moment of brilliance and other moments of sheer stupidity."
Also in the filing, the company wrote: "We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest to increase our subscriber base, increase the number and variety of deals we offer each day, expand our marketing channels, expand our operations, hire additional employees and develop our technology platform."
One way that Groupon has stayed ahead of the curve is buying competitors. With a bigger cash hoard from the IPO, it “will definitely try to buy up some (more) of the competition,” said Josef Schuster, president of Chicago-based IPOX Schuster LLC, a Chicago-based investment firm specializing in IPOs. In the long run, “that can't be good for the stock price.” |
