There is a lot of hype in the market for social networking technology companies such as Facebook, Linkedin, and services going along in the technology area such as Angry Birds game and Groupon. Recently, the market attention has been on Groupon’s IPO, the local e-commerce marketplace that connects merchants to consumers by offering goods and services at the discount. The company was founded just three years ago, in Nov 2008 and the executives have been quite bullish in the tremendous growth of the business.
In this round, Groupon has managed to raise $700 million in its IPO. On the evening of November 3rd, the IPO price was set at around $20/share. However, when it was available for secondary market on NASDAQ, its price has shot up to more than $31, with the advance of 55.7%. Currently, even it closed at lower price of $26.11/share, it was still more than 30% increase from the IPO proposed price. So at this closing price, the whole discounted marketplace of Groupon is worth $16.7 billion, nearly the size of Yahoo (YHOO, Financial), double the size of LinkedIn, and worth 8% of total Google (GOOG).
In terms of the fundamental, Groupon, since it was born, it has never been profitable. In the nine months end September 30th, the company reported the net loss to common stockholders of $308.1 million on the total sales of $1.1 billion. Even with its handsome growth with handful of members, the revenue growth of more than 2200% last year, the Groupon has burned cash like crazy. The operating expense over the same period of time grew faster than its revenue, at the rate of more than 5,700%. If the company wouldn’t growth the top line faster in the future or still keep burning rate lower, the business can’t go on forever. At this growth seen above, the company will lose more as it scales itself up.
In addition, along with its reported losses, the company comes up with their new accounting metrics itself. In the SEC filings, there is one item called “adjusted consolidated segment operating income” (CSOI), Andrew Mason explained it: “This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth.” However, this item doesn’t include online marketing expense, acquisition-related costs and stock-based compensation expenses”. If in Q1, the company had $117.15 million loss from operations, including $179.9 million in marketing expenses, or in the full year of 2010, a loss of $420.3 million includes online marketing expense of $241 million, acquisition expense of $203 million, and $36.2 million of compensation expense. If we take it all out to calculated so-called CSOI, we would have quite nice positive income. It was quite funny to have the Groupon growing without any marketing costs and customer acquisition costs. If not, the whole business might just collapse.
Last but not least, for early investors, the high price of Groupon at this IPO is very rewarding to them. Groupon’s investors and executives, including founders and biggest shareholder Eric Lefkofsky, and its CEO Andrew Mason, has using new investor money to cash out part of their holding, up to the amount of more than $900 million. Lefkofsky sold about $315 million in his early voting stock. And three big US mutual funds such as Fidelity Investments, T.Rowe Price and Capital Group with total investment of $375 million into Groupon in December, together owns 47.48 million shares in Groupon, which are now worth $1.24 billion in the market at the price of $26.11.
Whether to buy in Groupon in the secondary market depends on the individual taste and the analysis of different investors themselves. Nevertheless, I would not personally make any entrance into the stock at its price as the questionable in terms of fundamentals and its accounting treatment. With the market trend of high valuation for technology stock, it might still enjoy the wild rise in the short-term. But I would not feel comfortable owning it at this current price.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk
In this round, Groupon has managed to raise $700 million in its IPO. On the evening of November 3rd, the IPO price was set at around $20/share. However, when it was available for secondary market on NASDAQ, its price has shot up to more than $31, with the advance of 55.7%. Currently, even it closed at lower price of $26.11/share, it was still more than 30% increase from the IPO proposed price. So at this closing price, the whole discounted marketplace of Groupon is worth $16.7 billion, nearly the size of Yahoo (YHOO, Financial), double the size of LinkedIn, and worth 8% of total Google (GOOG).
In terms of the fundamental, Groupon, since it was born, it has never been profitable. In the nine months end September 30th, the company reported the net loss to common stockholders of $308.1 million on the total sales of $1.1 billion. Even with its handsome growth with handful of members, the revenue growth of more than 2200% last year, the Groupon has burned cash like crazy. The operating expense over the same period of time grew faster than its revenue, at the rate of more than 5,700%. If the company wouldn’t growth the top line faster in the future or still keep burning rate lower, the business can’t go on forever. At this growth seen above, the company will lose more as it scales itself up.
In addition, along with its reported losses, the company comes up with their new accounting metrics itself. In the SEC filings, there is one item called “adjusted consolidated segment operating income” (CSOI), Andrew Mason explained it: “This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth.” However, this item doesn’t include online marketing expense, acquisition-related costs and stock-based compensation expenses”. If in Q1, the company had $117.15 million loss from operations, including $179.9 million in marketing expenses, or in the full year of 2010, a loss of $420.3 million includes online marketing expense of $241 million, acquisition expense of $203 million, and $36.2 million of compensation expense. If we take it all out to calculated so-called CSOI, we would have quite nice positive income. It was quite funny to have the Groupon growing without any marketing costs and customer acquisition costs. If not, the whole business might just collapse.
Last but not least, for early investors, the high price of Groupon at this IPO is very rewarding to them. Groupon’s investors and executives, including founders and biggest shareholder Eric Lefkofsky, and its CEO Andrew Mason, has using new investor money to cash out part of their holding, up to the amount of more than $900 million. Lefkofsky sold about $315 million in his early voting stock. And three big US mutual funds such as Fidelity Investments, T.Rowe Price and Capital Group with total investment of $375 million into Groupon in December, together owns 47.48 million shares in Groupon, which are now worth $1.24 billion in the market at the price of $26.11.
Whether to buy in Groupon in the secondary market depends on the individual taste and the analysis of different investors themselves. Nevertheless, I would not personally make any entrance into the stock at its price as the questionable in terms of fundamentals and its accounting treatment. With the market trend of high valuation for technology stock, it might still enjoy the wild rise in the short-term. But I would not feel comfortable owning it at this current price.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk
