Yes, It Can Make Money—No, It Won’t Be Easy
(Personal comment: I have being saying this from DAY ONE…)
Six months ago, Groupon was the hottest company on earth.
The company had just turned down a $6 billion offer from Google, it was generating more than a billion dollars of revenue in year three, and it was said to be preparing an IPO at a ~$25 billion valuation.
Now, after a backlash against “daily deals,” several quarters of $100+ million of losses, and slowing growth, some people are arguing that Groupon is just a “Ponzi scheme” that will collapse the moment the company cuts back on marketing spending.
So, what’s the truth?
Somewhere in the middle.
Groupon has identified a huge new business opportunity and grown mind-bogglingly fast. It has fought off hundreds of competitors, including Facebook and Google. It has humiliated thousands of critics who have dismissed its business as “easily replicable with no barriers to entry.” And it has done this while consuming very little cash, thanks to its ability to operate with negative working capital.
At the same time, the company has also benefitted from the novelty factor of its primary product, daily deals, and that novelty may be wearing thin. It is hemorrhaging losses (losses, not cash), leading many observers to believe that it will never be profitable. And its investors have already taken more than $900 million off the table, enriching themselves while leaving the company low on cash.
So, what’s the next chapter in the story?
After taking a detailed look at Groupon’s business metrics, here is our take:
- Groupon has a real business and should eventually be profitable—provided management doesn’t screw up and run out of cash
- The transition to profitability will require Groupon to radically cut back marketing spending
- Cutting back marketing spending will sharply slow Groupon’s growth
- Sharply slowing growth will likely clobber Groupon’s valuation
- If Groupon raises a boatload of money in an IPO, several of these concerns will diminish: The company will be able to keep spending aggressively on marketing and not have to worry about running out of money or dealing with slower growth for a while. That said, the transition from growth to profits will not likely be a happy period for Groupon’s shareholders.
- If Groupon cannot get its IPO done, the company will likely have to raise money in the private market
There are several key metrics that support these conclusions. We’ve attached them as charts, and we’ll walk through them below.
Importantly, there’s precedent for a hyper-growth money-losing company like this transitioning to profitability—one that may offer a glimpse of what’s next for Groupon.
That company is Amazon.
In the late 1990s, many analysts argued that the perpetually money-losing Amazon would “never make money.” For a while, these concerns looked silly: Amazon’s stock soared, the company raised and spent huge amounts of capital, and growth blew the doors off.
But then the dotcom bubble burst and the capital markets shut down. And suddenly Amazon had to transition from hyper-growth and losses to slow growth and profits—without running out of cash in the process.
This transition was seriously challenging. Amazon’s stock tanked (see chart at right), and it nearly went bust. But, eventually, after a couple of rough years, the company emerged as one of the industry’s biggest winners, and it has gone on to build a colossal franchise.
This is not meant to suggest that Groupon is the next Amazon. There are some similarities between the companies, but there are also critical differences.
The part of Amazon’s history that Groupon appears headed for is the transition from losses to profits. How rough that transition is will likely depend a lot on whether Groupon can raise another big slug of cash.
Here’s why we think Groupon isn’t just a Ponzi scheme
Read more: http://www.businessinsider.com/blodget-groupon-analysis-2011-8#ixzz1X5Gq0PAg