Sunday, June 12, 2011

Groupon Is a Buy, but at What Price?

By Eric Jackson
RealMoney Contributor

6/6/2011 10:45 AM EDT
Click here for more stories by Eric Jackson

Most of the chatter and analysis of the Groupon initial public offering last Thursday was overwhelmingly negative.

I'm bullish on the company and its prospects in the long term and I don't think the bears have much depth to their analysis. That may come in time. But whether you should buy into the IPO all depends on price.

Here are the biggest arguments that the bears have seem to have so far, and my rebuttals:

1. This company is losing a lot of money, about $117 million in operating income in the last quarter.

Yes, it is. But when did you last see a company take its annualized revenue rate to $2.6 billion from $97,000 in three years? Never. To put that in comparison, LinkedIn (LNKD - commentary -Trade Now) went to $830 million from $77 million annualized run rate over the same period. This is not the late-90s dot-com phenomenon that was piling up losses on minimal revenue.

2. The only reason they're making money is that they're selling inventory at a loss, and that's not a business.

This is not (AMZN - commentary -Trade Now) with inventory and warehouses. They're selling virtual inventory. They are selling nothing at a loss. They are fulfilling a service in exactly the same way that Priceline (PCLN -commentary - Trade Now) and many other Web companies do, marketing a service that wouldn't otherwise be sold. That's why they get paid. The real reason they're losing money is because they've been making a huge investment in sales and marketing. They've gone from zero to 7,000 people in three years.

3. They will have to keep hiring people at this same rate in order to keep growing their revenue, so they will keep losing money.

Companies make lumpy investments in people and other capital expenditures all the time. Google just got raked over the coals by its investors for its abnormal bump in labor expenses. But this was a one-time bonus. spent a lot recently on their warehouses. They won't have to do this for the next couple of years again. Groupon does not need to keep hiring people the way they have.

4. The company is trying to fool us by getting us to focus on metrics that are non-traditional.

They suggested investors judge them by something called Consolidated Segment Operating Income (or CSOI). So what? They say right in the filing that this single metric shouldn'tLink be the sole way people judge them. What single metric is effective that way? Yes, CSOI puts Groupon's growth in a very favorable light, but it's not the sign of the apocalypse.

5. The founders have taken $28 million in holdings off the table.

A lot of Web companies these days, compared to 10 years ago, have taken money off the table. That's why SecondMarket and SharesPost are in business. Insiders will still have to hold the majority of their shares for a long time and incentives are still aligned with those of investors.


[*** This post is an excerpt of the full article, available by clicking here to go to Note: subscription required. ***]

Sphere: Related Content
blog comments powered by Disqus