"I just heard the world, is breaking down into bits again.
Tell me what am I to do?"
- OAR
The sky is falling and the bubble is growing. But wait, Marc Andreessen (acclaimed VC investor) said the reason it's not a bubble is because everyone thinks it is. Huh? Yeah exactly, I wasn't too sold on this theory either but given Andreessen's track history with investing in multi-billion dollar companies (Zynga, Twitter, and Facebook) and the fact that he invented the first browser (Netscape) back in the mid 90s gives him some credibility. The sky is falling because Groupon has just filed for an IPO which will be lead by three investment banks: Morgan Stanley, Goldman Sachs, and Credit Suisse.
Yes, Groupon has ridiculously high and very rapid growing revenues, with $644.7 million in revenues in Q1 of 2011 alone. But they lost $450 million overall and spent $263.3 million on online advertising. So, when will Groupon actually be profitable? That's the million dollar question, or $20 billion dollar question if you consider what they'll be valued when they go public, sometime probably in July. Groupon remember rejected a $6 billion takeover from Google just a couple months ago. So, CEO Andrew Mason clearly feels as though his company can really capitalize on the investor demand as the next hot tech stock, having seen LinkedIn's success.
Unlike the rest of the US economy, Groupon is and has been on a hiring craze. With 7,000 employees already (these are mainly salespeople trying to find merchants) the company looks to expand even more. Just as Reid Hoffman noted in his reasons for LinkedIn going public, Mason mentioned that this IPO will help raise some money for making acquisitions. This money could come in handy given the competition for coupon type deals from LivingSocial, Google, Amazon, and Facebook. To keep up with these four, Groupon might have to keep incurring a loss.
The startling number and one Groupon investors and bankers alike should feel somewhat optimistic about is the gross profit. They were up 24, 600% last year from $10.9 million in 2009 to $280 million in 2010. Now, gross profits do NOT take into account the business expenses and in this case all that money their pouring into online advertising. As much as Wall Street will try to underscore Groupon's revenue stream, they are not profitable and probably won't be for another 2-4 years. How much will Groupon need to spend on hiring employees and furnishing their name online before they make money? I will say the exponential increase in revenue is a positive sign, and something that Pets.com and Webvan.com did NOT have during the dot-com boom.
But I'm a skeptic, and I think Groupon unlike LinkedIn, is more of a trend or a fad, rather than a long-term sustainable business. There has to be a good deal of small businesses who aren't having as grand a time as we the consumers. Especially since these small business are already strained for cash and now we're paying less for their services, I don't see this lasting. Although, the number of subscribers increased to 83.1 million this quarter compared to 3.4 million from a year ago. That is also a positive sign. The fact that Groupon has increased revenues over 1000x the past 2 years and still has no profit, is a bad sign. Not to mention the fact that to compete with LivingSocial, Google, etc. they need to keep pouring money into advertising and hiring. How patient are investors going to be with this company before they start selling or better yet, running? Marketing advertisements are something Groupon can't live without, but shareholder value is something the company needs to keep its investors satisfied.
Groupon then has a strong correlation with Amazon, a company that became profitable 7 long years after its 1997 IPO. Are investors going to sit around waiting for Groupon to go through the same growing pains? I think not. And Groupon will clearly not be like Netscape in 1995 when it IPOed and had immediate success. Mason's unorthodox leadership could be a make or break for this highly anticipated private company. Having Starbucks CEO Howard Schultz as a board member could pay big dividends (not just to investors down the road) but to the company. Schultz turned Starbucks into an incredibly successful company and he knows a thing or two about deal/purchasing goods. "We are unusual, and we like it that way," wrote Mason in the SEC filing released this afternoon. That sounds like a tagline for some Wes Anderson movie or nudist rally, not a company who's trying to prove it's a worthy investment.
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