Worth Reading: Groupon Missed the Boat

As Groupon prepares for a much-anticipated initial public offering, turning down that $5 billion offer from Google is starting to look like something its founders might regret. That’s because, according to Vik Kathuria, managing partner of corporate strategy and digital investment at Group M’s MediaCom, Groupon’s meteoric growth trajectory is already fading, and its profitibality prospects are under threat. Even more ominous for the Web coupon retailer is that Google, Facebook and Amazon — three of the most powerful companies on the Internet — are each poised to make hay in this space. Kathuria, himself a former Wall Street investment banker/trader, also sees a negative motivation for CEO Andrew Mason and company; some preferred investors need to get paid — quickly. Here’s the argument he made last week in an email sent to clients:
Groupon has filed an S-1 to IPO, looking to raise $750 million. According to the form its 2010 revenues were $713 million and revenues grew 22.7X in 2010. Quarter 1 2011 revenues were at $644 million. The company lost $456 million last year and lost $146 million last quarter. Groupon has 83.1 million subscribers, 15.8 million of which have purchased a Groupon. There have been over 70 million Groupons sold as of today with 30 million sold in 2010 and 28 million bought in the first quarter of 2011. Groupon is SCALING AT A LOSS (Q1 Loss from operations: $117 million compared to $8.5 million profit a year earlier. Seems like even at a $3+ billion run rate in 2011, Groupon appears to be marginally profitable at best. In addition, Groupon’s business model is not sustainable; average revenue per offer is in the tank. Customer acquisition seems to be prohibitive for Groupon and in many cases for the end merchant. Plus, email is a dated delivery vehicle, multiple offers from multiple competitors. What happens when Amazon/Google and Facebook get momentum going in this space. The model does not work small or at scale. Also interesting is the fact that Groupon raised a total of $946 million in two funding rounds last winter. It kept $136 million of it help run the money-losing company. The remaining $810 million was paid out, via stock purchases, to CEO Andrew Mason and some of his backers, including Eric Lefkofsky, and, notably, the Samwer brothers, who sold their CityDeal company to Groupon in 2010. What you see in these rounds is the insider cashout and now the rush to the IPO for “inside deals” to preferred clients at private wealth management groups for Morgan Stanley. There will definitely be an initial pop after IPO (probably at a $15 billion to $20 billion valuation), but is it sustainable given the fundamentals above?