Tag Archive for Groupon

Groupon’s Fired Chief Takes Full Responsibility

Groupon Stock from Yahoo Finance
Groupon’s Stock has fallen by over 80% since IPO Source: Yahoo! Finance

Business Insider published yesterday the goodbye letter written by Andrew Mason, Groupon ex-CEO’s, to Groupon’s employees.

In this letter Andrew Mason admits being fired and takes full responsability for Groupon’s failure : “From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a  stock price that’s hovering around one quarter of our listing price”.

This admittance is probably one of the best things Andrew Mason has done for the company he founded.

He was not alone to be misguided. Most importantly, he was not alone in misguiding others by overstating Groupon’s market value when raising $1.3 B dollars from investors and later issuing Groupon’s stock at $20 in its Nov. 2011 IPO. After a very short rally, Groupon’s stock price fell to below $5, where it’s staying now.

Hopefully, Groupon’s board will be wiser in the guidance they give to the next Groupon CEO.

Groupon’s Stock Price Yo-yo

Groupon's Stock Price As of Dec 9 2001
Groupon’s Stock Price As of Dec 9 2001 – Source Bloomberg

One -hopefully last- post about Groupon‘s stock price (GRPN), for the sake of completion. Groupon’s stock price has been going up and down (max $31, min $15) like a yo-yo since the stock’s November 2011 IPO. It is now back up to above its $20 issuing price.

Most analysts are skeptical or downright negative about Groupon’s financial fundamentals. I am. GRPN has assets such as its popular brand name and its significant lead over LivingSocial, its Nr 2. But Groupon hasn’t yet built the sustainable money-making machine that would justify its current price/sales ratio — more details in previous posts below.

But who cares about fundamentals? GRPN’s stock price is not determined by the company’s financial fundamentals but rather by investors’ anticipation of their fellow investors’ behaviour and by issuing conditions — such as a very low float of less than 5% of the stock which also largely explains the large current variations.

In some sense, GRPN is not much different from Western governments: raising and spending money like there is no tomorrow.  Let’s hope that at some point they can turn (around) into some serious, financially sound business!

Groupon’s IPO Stock Price

As Groupon’s IPO nears its debut on November 4th, the company is rumored to want to increase its stock issuing price due to the positive reception of its IPO roadshow. Some call this “not leaving money on the table”.

It would be a risky game for the company to raise its price in this already highly speculative and risky IPO. Groupon needs the cash. Investors need to see a high upside. VCs need liquidity. Nobody wants to see an IPO that flops, and even less so Groupon collapse, as argued by Rocky Agrawal in Venturebeat.

Groupon’s IPO stock price could at first rise well above the current asking price of $16-$18 as a result of the well orchestrated speculative rally. Past the IPO fever of the first day(s), many smart investors will take their profit and the price will fall to the lower levels more closely related to the company’s financial outlook – as happened in most recent IPOs.

By raising its price, Groupon could chill investors and prevent the rally.

There are major flaws in Groupon’s fundamentals : 1) growth slowdown, 2) commission erosion, 3) short-term liabilities, 4) diminishing revenue per subscriber, 5) questionable operating efficiency, 6) questionable management ability to lead a quoted company. This issues are not addressed in the rosy picture painted by the company’s roadshow. According to these fundamentals, Groupon does not command the price it is currently asking for, and even less so a higher price.

But Groupon could be one of many stock prices decorrelated from their companies’ fundamentals.

These issues are discussed in the remaining of this post which updates and expands on a detailed analysis I published in June under the title Groupon Bashing Unleashed

Read more

Groupon bashing unleashed

Only two weeks ago, local-deal start-up Groupon was acclaimed as an unprecedented eCommerce success and its IPO was as hotly anticipated as Facebook‘s. Since then, however, Groupon’s S1-Filing disclosed a cumulated $540 million loss on a cumulated $1.4 billion Gross Transaction Value. Suddenly, all love for the eCommerce posterchild seems lost and every aspect of the business is slashed. I believe critics should have been wiser earlier and the investment bankers who hyped up Groupon are to blame.

Bertolt Brecht Picture from Bundesarchiv Source Wikipedia

Bertolt Brecht Picture from Bundesarchiv Source Wikipedia

“Do not let anybody put you on a pedestal because once people realize you’re just human, it’s you that they destroy, not the image they created”. Groupon’s CEO Andrew Mason should probably meditate this thought from German author Bertolt Brecht.

Andrew Mason and Groupon, the company he co-founded in 2008, became the talk of the town after the company raised $135 million in April 2010 and, even more so, after it raised a whopping $950 million in January this year. With over 80 million online subscribers in more than 40 countries, Groupon dominates the booming local deal market it has contributed to create. Until recently, most observers were in awe. To name but one example of the Groupon-groupies: Last August Groupon was described by Forbes as the “fastest-growing company in Web history” and “what the dot-com boom was supposed to be all about“.

Well, now it seems that Groupon is rather exactly was the dot-com bust was about: a completely inflated valuation. Since Groupon has released its S1-Filing and revealed a cumulated loss of $540 million, criticism is raining on every aspect of the business. Worse, the critics are among the most influential voices in finance and eCommerce: Bloomberg, The Street, Marketwatch, The Economist, the FT, the Wall Street Journal, thisismoney.co.uk, Huffington Post, TechCrunch and more.

Below I review the 5 most critical points why Groupon is overvalued: 1) Inflated revenue and income; 2) Lack of merchant and customer lock-in; 3) Bad deal for private IPO investors; 4) Leadership flaws; and, most importantly, 5) Lack of financial value multiplier Read more

Bubble or Trouble?

Are we experiencing a second Internet bubble?
The answer is clearly: yes.

When group buying, flash sales and straightforward B2C sites like Groupon, Ideeli and Lot18 raise money by the 100’s or 10’s of million dollars in ultra competitive markets, it means that too much money is chasing too few investment opportunities. Many start-ups are caught in a race to grow by acquisition (of traffic, of competitors…), to sell out before even attempting to break even, to IPO before everyone else does… Read more

Is Groupon’s valuation justifiable?

Not really.

Local deals’ leader Groupon is currently valued at $15 to $20 billion for an estimated $1 billion 12 month revenue and LivingSocial at nearly $3 billion for half that. A lot of people are raising the issue of whether Groupon’s valuation is justified.

Firstly, it’s unclear what could prevent the many competitors from chipping away at Groupon’s first entrant’s lead. Next to LivingSocial, there are more than 500 competitors in the US alone, not least Google itself with Google Offers.  Groupon is well-established in North America and in major cities around the world. It still leaves plenty of room for more local competitors, for example in smaller cities.

Groupon’s main IP assets are claimed to be 1) its superior analytics to match user profiles to deals, 2) great email marketing, and 3) an “industrialized” sales process. It sounds good, but not really like something that a Google or an Amazon could not replicate.

The most important question is whether Groupon really create merchant and customer loyalty. Groupon claims on its Web site that 97% of its merchants come back for more. I’ve been told that Groupon users are quite addicted to it. However, the main motivation of merchants and customers still seems to be Groupon’s lead in numbers of deals and numbers of customers. There does not seem to be any other major customer lock-in, not major switching costs that would prevent merchants and users to lessen their engagement with Groupon. Groupon seems to be maintaining its lead by spending the $1.15 billion it raised on sales and advertising, i.e. by burning cash rather than creating sustainable merchant and customer loyalty.

According to Compete, LivingSocial’s (main?) Web site had 60% fewer online visitors than Groupon’s in March 2011. But LivingSocial’s has a much larger number of active Facebook followers (3 million or three times more in March 2011) — which could bring more sustainable customer stickiness. LivingSocial already enjoys a 25% higher satisfaction rating on FaceBook.

Related post

Selling $1 bills for 99 cents

Selling $1 bills for 99 cents

During the first Internet bubble, many dot.com companies were spending their funds on advertising in the hope to quickly inflate the number of their users and, hence, their company value. It was called “selling $1 bills for 99 cents”.
Now (in the second Internet bubble?), selling $1 bills for 50 cents has become a popular business model, it’s called Group Buying or Local Deals and it consists in
55% discount on Groupon

55% discount on Groupon

offering online coupons for heavily discounted (at least -50%) deals at local restaurants, spas and other services.
Group buying provides a touch of social shopping: the discount is granted only if there are enough buyers.
The concept meets strong demand from both local merchants who want more foot traffic and from shoppers who can’t resist a good bargain. I wonder how far it can go. Some claim that discount coupons don’t create customer loyalty (on the contrary, consumers switch to the next coupon supplier). Others that there is an organic ceiling to what is essentially a loss leader business.