Charles Rex Arbogast/Associated PressGroupon’s Chicago headquarters. The online coupon company plans to sell 34.5 million shares in its initial public offering.
The title of the article was “Amazon.bomb.”
Back in 1999, Barron’s memorably splashed that headline across its cover. The article was a virtual indictment of Amazon: it questioned the company’s ability ever to turn a profit, it argued that it was spending far too much money on marketing, it suggested that the company was using misleading accounting metrics and that its business model was not unique enough to keep more established competitors from eating its lunch.
Fast-forward to today. If you were to replace the word Amazon in the original Barron’s article with Groupon, the high-flying online coupon company in the midst of pursing an initial public offering, the story would be almost exactly the same — except we don’t know yet if Groupon has such a happy ending.
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As Andrew Mason, the chief executive of Groupon, crisscrosses the country this week on an I.P.O. road show for his company — he started in Manhattan on Monday — he is hoping to convince investors that Groupon is indeed the next Amazon, and that the naysayers are wrong.
Last week, I wrote a column raising questions about how it was possible that the banks underwriting Groupon’s I.P.O. could have ever considered valuing the company at as much as $30 billion just three months ago, and I predicted the company would more likely be valued at easily less than half of that.
It wasn’t such a bad estimate. On Friday, Groupon disclosed its latest earnings and said that it was slashing its valuation, to a range from $10.1 billion to $11.4 billion.
But poring over Groupon’s most up-to-date numbers suggests there’s a problem with the new valuation: it may still be too high.
“Consider us skeptical,” Rick Summer, a senior equity analyst at Morningstar, wrote in a report after the numbers were made public.
What does he think Groupon is worth?
No more than $5 billion, he estimated, based on his discounted-cash-flow model. That’s about $1 billion less than Google offered to buy Groupon for earlier this year. Groupon, audaciously, rejected the bid.
“The company has not been able to achieve profitability, as expense growth continues to outpace revenue gains,” Mr. Summer said, predicting that Groupon is unlikely to turn a profit until 2013.
Of course, it could turn profitable more quickly. Mr. Summer’s assessment is clearly pessimistic — Groupon was practically break-even in its North America operations in the last quarter, though it continued to lose money in foreign markets. In total, the company lost $10.6 million in the third quarter, which is still better than the $101.2 million it lost in the second quarter.
One of the reasons that Groupon was able to show itself at nearly the break-even point in the North America was that it reduced its marketing and advertising budget, slashing it to $181 million in the third quarter, compared with the $432 million it spent in the first half of the year.
But Groupon’s growth also slowed considerably during the same period: its revenue rose by only 10 percent. The previous quarter, revenue had grown 33 percent and the quarter before that, 72 percent. Do you see a trend?
“Although the company can ratchet down some expenses, we believe decreases in marketing spending may actually lead to revenue declines,” Mr. Summer said.
Growth, of course, is crucial to justifying the $10 billion price tag. Indeed, as several investors told me, anyone putting money into Groupon actually has to believe that its value could reasonably rise by, say, 50 percent in the next couple of years, making it a $15 billion company. Given the risk involved in investing in a relative start-up, the reward has to be outsize.
Groupon isn’t making any long-term projections. But is a $15 billion valuation realistically foreseeable in a couple of years when a $10 billion valuation today seems like a stretch? How many pure Internet consumer-oriented companies based in the United States do you know worth more than that? Google, Amazon, eBay, Yahoo and Priceline are the easy ones; after that it becomes challenging.
Still, in fairness, it must be acknowledged that LinkedIn, which had its I.P.O. earlier this year and was criticized for being overhyped, is worth about $9 billion. If you believe LinkedIn’s valuation makes sense, you should load up on Groupon because it looks downright cheap by comparison. (I may have a bridge to sell you, too.)
Here’s just one data point for comparison: LinkedIn is trading at 195 times its free cash flow. If Groupon were valued using the same multiple, it would be worth a whopping $48 billion.
Groupon is planning to sell only about 5 percent of the company, or 34.5 million shares, to the public initially. Having such a small amount of the company available should, at least temporarily, help keep interest high. (The laws of supply and demand are incontrovertible.)
None of this is to suggest that Groupon isn’t a great success story. The three-year-old company has built a remarkable business, upending the direct marketing industry. But that doesn’t mean the company is worth $10 billion — at least not yet.
So why is Groupon so intent on going public in a bad I.P.O. market at a valuation that has been questioned?
Naturally, it wants the highest valuation it can possibly receive. Groupon needs to go public at about $10 billion to avoid hurting some of the investors that supported the company during the last private pre-I.P.O. round. The T. Rowe Price Group, for example, bought into the company at a valuation of $4.7 billion, but now holds the investment on its books at $8.7 billion. If the I.P.O. were to value it at less than that, T. Rowe would have to mark down the value of its investment.
It is possible that Mr. Mason, Groupon’s chief executive, will turn out to be the new Jeff Bezos, Amazon’s chief executive.
Since Barron’s “Amazon.bomb” headline, the company’s shares have jumped 257 percent. Barron’s ran a mea culpa two years ago calling the company, “The World’s Best Retailer.”
We’ll see in a decade or so whether a follow-up column is needed.
Article source: http://feeds.nytimes.com/click.phdo?i=4cb178796d1183b3f12be03b01eb7508