Grouponís IPO Story is Falling Apart
Groupon filed an amended S-1 prospectus for their IPO, and now thereís more grist for the mill. Iím still bearish and feel justified by the new data that came out. Letís review the objections I had in the June newsletter and the new information.
1. Prior statement: Groupon isnít profitable. They use an odd measure to make themselves look profitable.
New Information: First of all, Groupon dropped their controversial measure of ACSOI (ďAdjusted Consolidated Segment Operating IncomeĒ). I had mistakenly called it CSOI in June, but the key was that it excluded marketing costs. Turns out the SEC objected as well: see the NYT story. Now they include marketing costs. And now they show themselves as unprofitable.
2. Prior statement: Margins are at risk.
New Information: Gross margin in Q2 dropped 3% from Q1 2011. Further, their CSOI, which had been 12% in 2010 is (7%) in Q2 2011. And all this has happened while Groupon continues to stick with the 50-50 split. If that changes, their economics will be hurting even faster.
3. Prior statement: Revenue growth and customer analysis seem unlikely to justify the valuation.
New Information: First revenue did grow, and significantly. The NYT article noted $878M in revenue and called it a 36% increase over Q1, but itís only an 18% increase over what was reported previously for the first quarter in the initial S-1. Either way, itís not enough: my DCF showed they needed to have 200% revenue growth over the year, which is 32% per quarter this year, compounded. Already theyíre falling behind.
And it gets worse. Two key metrics for Groupon are Revenue/Subscriber and Revenue/Customer. I had noted previously that for Groupon to justify a $30B valuation, they would need three billion subscribers in 2022 if their metrics held. But the metrics are already deteriorating, and fast: revenue/subscriber fell by 30% from Q1 to Q2. And while deals/customer increased slightly, Revenue/Customer fell by 15% in the quarter.
Everywhere you look, Grouponís story seems to be falling apart. I remain a skeptic.