Friday, June 24, 2011

Groupon IPO Analysis

Much has been written about the $420 million loss reported by Groupon in their pre IPO filing. While one would have liked to see a positive number already, frankly, it is tough for a company which grew at 2241% last year (from ~$30 million in 2009 to ~$713 million in revenues in 2010) and revenues in Q1  -2011 are already over 644 million (vs 44 million in Q1 2010)

Off the 420 million loss, roughly half is acquisition related, non recurring, one time loss. Balance costs includes cost of about 242 million in Online marketing primarily to acquire subscription customers (like you and me) who subscribe to their daily coupons. Much of this is also likely to reduce in proportion once the growth rates fall to less than 100%.  (they already have over 83 million subscribers across 43 countries)

Similarly, G&A costs as a proportion of revenue would also likely, go down as it gains scale in the new markets that it is establishing itself in.

What is interesting in their filing is that they have netted off these expenses and shown a non-gaap measure called Adjusted Consolidated Segment Operating Income (adjusted CSOI). Various financial reporters and experts have panned them for this, accusing them of trying to rewrite acconting rules or trying to mislead investors.

On the contrary, I believe that Groupon is justified in this as 1) this is normal practice to show non-gaap measures to remove effect of special circumstances and show how numbers would be like in steady state and 2) it is really meant for the benefit of experienced investors and equity analysts who can use this information to build their future projection. The adjustments too are clearly marked and the filing clearly explains as to why the expenses being adjusted are not normal runrate expenses.

Now, just annualizing Q1 revenues puts them in revenue runrate of $2.6 billion a year. However given their growth rate, I suspect that they can easily end up in the range of $4-5 billion for the year 2011 or more. At these levels the asking valuation of $20 billion does look attractive.

What remains to be seen is how grabbing an early lead in number of subscribers, leads to a sustainable competitive advantage (with all the clones gunning for the same pie)

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