Groupon has outlined its IPO plans in a filing with the SEC. We’ve looked at the provider of daily deals before; see our background article ‘Facebook, Groupon, Twitter propel internet valuations’. We look here again at the valuation, which according to the New York times could reach USD 30 billion.
To start with a few general observations:
o There is talk of a new internet bubble, but in general this doesn’t appear to be the case. The LinkedIn share price doubled after its listing, but that seems to have more to do with the IPO being priced too low by the arranging banks than the company’s results. Its growth is in fact extremely high.
o While the bubble ten years ago was the result of very high expectations, today every company needs to be looked at individually. Many internet companies are highly profitable, but certain are not. Groupon and Pandora, which is also listing, are still loss-making.
o Business models vary for each company. Groupon appears to be less profitable due to high marketing spend. Facebook doesn’t need to spend on this, but does need to focus on product development in order to grow.
o Groupon operates on a market with a low barrier to entry. Facebook, Apple, Google, Microsoft, Amazon, Yahoo!, eBay – they all have a similar service. Companies from other sectors are also entering the market, such as newspapers and telecom operators (eg AT&T via YP.com).
o Groupon is growing largely through acquisitions, mainly outside the US. It’s difficult to determine its organic growth. As we’re talking retail (e-commerce), the preferred indicator would be same-store sales (see more belwo): the sales per store or market, excluding takeovers and new outlet openings.
Where’s Groupon at the moment? The Q1 results outlined below:
o Revenues of USD 645 million, equal to annual growth of 1,357 percent (a fivefold increase).
o Operating costs of USD 387 million, 34 times more than a year earlier.
o Net result: a loss of USD 146 million.
o It had 83.1 million subscribers (24 times more) and 15.8 million active customers (x18). There were 56,781 associated merchants (x 20) and 28.1 million groupons sold (x16).
o Groupon was active in 43 markets (cities) in North America in Q1 and 43 other countries. This is up from five North American cities and no foreign operations as of mid-2009.
o Over the same period the number of employees grew from 37 to 7.107.
If we do a few calculations, the figures show some less spectacular underlying trends:
o The number of groupons sold per customer has fallen from 2.01 a year ago to 1.78 in Q1 2011.
o The number of groupons sold per merchant fell from 606 to 495.
o Revenues per North American market rose from USD 660,000 in Q2 2009 to USD 1.72 million in Q1 2011, equal to annual growth of 72 percent. This could be considered similar to the above-mentioned same-store sales.
Based on this figure of 72 percent growth, revenue over the full year 2011 would come out at USD 4.44 billion. This assumes only organic growth and excludes any acquisitions or new market entries. This is still optimistic, as it’s clear that the 72 percent growth rate will fall to more normal levels. Even the powerful Amazon, which is currently benefiting from strong sales of consumer electronics, only reached 38 percent growth in Q1. And Amazon is a company that has been showing double-digit sales growth for years.
Finally, we look at Amazon’s sales multiple, which is currently an enterprise value of 1.72 times expected revenues for 2011. If we give Groupon twice the multiple (3.4), due to its higher growth, we get a value of USD 15 billion (3.4 x USD 4.44 billion). That’s half the value mentioned by the New York Times.
Considering the above, Groupon may nonetheless aim for the highest valuation it can get away with. After all, it has extraordinary growth rates to support a high valuation, even though acquisitions form a substantial part of the growth. However, the growing competition and much less spectacular growth in the revenue per market could throw a spanner in the works. So for a successful IPO, the company will need to be quick.
