Groupon Is a Buy, but at What Price?

By Eric Jackson
RealMoney Contributor
6/6/2011 10:45 AM EDT
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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 Amazon.com (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. Amazon.com 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't 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.

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Notes From the Ground in China, Part III

By Eric Jackson
RealMoney Contributor
11/1/2010 11:15 AM EDT
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I've been in China for the last 10 days, and I've been tweeting out pictures and comments all along the way. If you're interested, please check out this Flickr group to see some.

I've been surprised at how many people have sent tweets or messages to me in response to my updates. U.S. investors are obviously very interested in China. Some are very bullish on the country and its equities, while others are very nervous and believe the country's economy is about to fall off the cliff. I want to respond to some of the criticisms I've heard and respond to them on the basis of my on-the-ground experiences in the country.

First of all, a disclosure: Anyone who has read some of my articles will know that I'm bullish for the short and long term on China. I don't consider myself a Pollyanna. I would like to think I'm a realist. There certainly are risks to the country's future growth. However, I don't think the risks I see match up with the ones most commonly expressed by Jim Chanos orThe New York Times.

• Concern No. 1: China has a housing bubble that's going to explode.

This concern has been out there for almost a year and was probably started by hedge fund manager Jim Chanos. Even he admits that this is likely only a bubble relevant to China's "coastal cities," which are experiencing the most growth (Shanghai and Shenzhen, but Beijing must be included as well, being the capital and such an important place for government and commerce). The Chinese government enacted restrictions earlier this summer to cool down speculation in the hot markets (although lower-tier cities had the freedom not to enact the new rules and haven't). There is certainly evidence that the quantity of transactions in these cities dropped immediately after the new rules were implemented, but the prices in major cities have stayed up.

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Oh, Dear, Canada!

By Eric Jackson
RealMoney Contributor
7/19/2010 1:45 PM EDT
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Canada's economy has been the subject of many glowing reviews by American analysts over the last 18 months. In comparison with the U.S., the Canadians seem to have a great thing going. Unemployment is 7.9% versus 9.5% in the U.S. There has been no major failure of a Canadian bank. The country's debt-to-GDP ratio is only 70% versus more than 90% in the U.S.

The Canadian housing market has also shown remarkable resilience and even strength. Home prices, although they declined in the wake of the Lehman Brothers bankruptcy, have now recouped all their losses and are higher than they were prior to September 2008.

When the U.S. economy drove into the ditch in the fall of 2008, the Canadian government got rightly scared, as Canada's economy has often been the tail on the U.S. dog, manufacturing lots of American cars, as well as shipping oil, gas and lumber across the border. (Most Americans don't know that Canada is the largest exporter of oil to the US, far ahead of any Middle Eastern country.) The Canadian dollar -- used by traders as a proxy for a bullish bet on commodities -- went from a pre-crisis high of near parity with the U.S. dollar to 78 cents by October 2008.

The Canadian government responded to the financial crisis in much the same manner as the U.S. -- a similar level of stimulus dollars on a GDP basis (remember that Canada is 10% the size of the US economy) and a similar level of government purchases of mortgages off the balance sheets of banks on a GDP basis. Interest rates plummeted and mortgages became a lot cheaper.

In contrast to the US, Canada's housing market had not been as overheated for as long. While most U.S. house prices ramped up starting in 2002, when rates dropped after 9/11, in Canada, most housing prices didn't really start to appreciate to U.S.-type levels until 2006. Therefore, even though the Canadian housing market did freeze up after Lehman, by May 2009, with low rates and a comparatively better local economy, most Canadians started to jump back into the housing market with both feet -- especially in the two hottest markets of Vancouver and Toronto. Property bidding wars in Canada became common between May 2009 and as late as April 2010.

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