Daily deals group-buying service Groupon has filed a S-1 document with the Securities and Exchange Commission today, meaning it is officially on the road to an initial public offering. Groupon is filing for a $750 million IPO on valuation of its Class A stock.
Groupon must have liked what it saw from the LinkedIn IPO. It becomes the second major tech company to hit the public market. The difference between Groupon and LinkedIn though is that Groupon makes significant revenue, has been around half as long as LinkedIn and may or may not actually be a technology company. What are the revenue and risk factors for investors thinking about Groupon stock? We take an in-depth look below.
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Revenue and Metrics
Groupon gross revenues in 2010 were $713.3 million with gross profit of $279.9 million. According to the S-1, Groupon has almost reached that gross revenue in 2010 in the first quarter of 2011 with revenue of $644.7 million and gross profit of $270 million.
Groupon measures its key operating metrics in terms of subscribers, customers, featured merchants and Groupons sold. In the first quarter of 2011 Groupon boasts 83.1 million subscribers worldwide with 15.8 million cumulative customers over 56,781 merchants. That equates to about 28 million Groupons sold in the quarter ending on March 31. In comparison to 2010, that is about 26 million more Groupons sold in the same time frame. So, the idea is: if you grow your business by $250 million in corresponding quarters (almost $20 million first quarter 2010, $270 million first quarter 2011) then it is time to go public.
Weighing the Risk Factors
Groupon warns that it may not maintain the revenue growth that it has experienced since inception. It went from $3.3 million in the second quarter of 2009 to $644.7 million in the first quarter of this year, so that is a fairly reasonable warning. Groupon also does not know if the business model can be sustained or maintained.
“Our business has grown rapidly as merchants and consumers have increasingly used our marketplace,” Groupon wrote in the S-1. “However, this is a new market which we only created in late 2008 and which has operated at a substantial scale for only a limited period of time. Given the limited history, it is difficult to predict whether this market will continue to grow or whether it can be maintained. We expect that the market will evolve in ways which may be difficult to predict.”
Other risk factors for Groupon include: failure to retain or acquire subscribers; failure to stave off net loses due to operating expenses; failure to add or maintain new merchants; failure to hold off competition and clones; failure to recover subscriber acquisition costs (marketing expenses such as the infamous Super Bowl ads); disruption of email chain or email restrictions; international growth problems.
Those are the highlights of Groupon’s risks, though the S-1 does go on for about 10 more pages outlining potential harmful market conditions including government regulation of e-commerce or losing members of the managerial team.
Operating At A Loss, But Come Along for the Ride
The majority of Groupon’s revenue in the first quarter of 2011 was international with $346.8 million in sales accounting for 53.8% of revenue. The net loses mentioned in the risk factors could be detrimental to Groupon’s long term viability. In the “net loss attributable to stockholders” column, Groupon lost $2 million in 2008, $6.9 million in 2009, $456.3 million in 2010 and $146 million so far in 2011.
The beginning of the Groupon S-1 filing starts with a letter to potential stockholders from CEO Andrew Mason. In it he states that Groupon spends aggressively on growth, is always reinventing itself and that it is “unusual and we like it that way.”
“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,” Mason said. “The speed of our growth reflects the enormous opportunity before us to create a more efficient local marketplace. As with any business in a 30-month-old industry, the path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity.”
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