Groupon: Why the Hate?

In discussing the value, or often lack thereof, with lead generation businesses, it’s hard for us not to think about the biggest lead gen business of all, Groupon. Not that they would use that term, but there is a reason that most of the fast followers and better self-funded iterations came from the lead generation world. They looked at the model and said, hey this looks familiar. It’s the email submit model except instead of a handful of advertisers that people don’t care about and an endless funnel meant to frustrate them, this one involved getting them to pull out their credit cards. It made advertising content with the biggest downside being the sales force challenge of finding enough good deals and scaling into enough markets.

Groupon arguably solved the scaling into enough markets, and from the industry perspective it solved the offer issue. The consumers might disagree, and the not infrequent deal mishap keeps the company forever in the spotlight, just not necessarily positively. Thanks to a billion dollars in funding though, the company kept chugging and went public. Investors who had shares at the IPO price of $20 did well on the first few days as the stock traded close to $30 at its high. The last several days, though, have shown a different side and challenge for Groupon. From a high of $30 to a low of $15, including a decrease during a broader tech rally, the stock seems to have the market against it. Not that it should bother the company much. It still has a value north of $11 billion.

It’s hard to say why Groupon teeters on the edge. For as much as they were loved, they are now vilified. That they even went public is almost amazing given the constant revisions and seemingly no shortage of folly that could read as self-destructive behavior. In Groupon’s case, their folly’s helped interested parties because the delay had the company share an additional quarter’s worth of data. We decided to take a look back – to the filings – for some insights into the story of the declining stock price today. Never a sound investment idea, but we needed some irrational way to make sense of things.

From Form S-1/A on September 23:

• We increased our revenue from $1.2 million in the second quarter of 2009 to $392.6 million in the second quarter of 2011. We generated these revenues from gross billings of $3.3 million for the second quarter of 2009 as compared to gross billings of $909.2 million for the second quarter of 2011. We had net income of $21,000 for the second quarter of 2009 as compared to a net loss of $101.2 million for the second quarter of 2011.

From same form on November 1:

• We increased our revenue from $1.2 million in the second quarter of 2009 to $430.2 million in the third quarter of 2011. We generated these revenues from gross billings of $3.3 million for the second quarter of 2009 as compared to gross billings of $1,157.2 million for the third quarter of 2011. We had net income of $21,000 for the second quarter of 2009 as compared to a net loss of $10.6 million for the third quarter of 2011.

September 23:

• We increased our subscriber base from 152,203 as of June 30, 2009 to 115.7 million as of June 30, 2011. A total of 43,014 customers purchased Groupons through the end of the second quarter of 2009 as compared to 23,072,600 through the end of the second quarter of 2011, including 12,066,676 customers who have purchased more than one Groupon since January 1, 2009.

November 1:

• We increased our subscriber base from 152,203 as of June 30, 2009 to 142.9 million as of September 30, 2011. A total of 43,014 customers purchased Groupons through the end of the second quarter of 2009 as compared to 29.5 million through the end of the third quarter of 2011, including 16.0 million customers who have purchased more than one Groupon since January 1, 2009.

September 23::

• We sold 116,231 Groupons in the second quarter of 2009 compared to 32.5 million Groupons in the second quarter of 2011.

November 1:

• We sold 116,231 Groupons in the second quarter of 2009 compared to 33.0 million Groupons in the third quarter of 2011.

September 23:

• We grew from 37 employees as of June 30, 2009 to 9,625 employees as of June 30, 2011.

November 1:

• We grew from 37 employees as of June 30, 2009 to 10,418 employees as of September 30, 2011.

What do we learn? Between July 1 and September 30 of this year, the company:

• Added just under 800 employees between July 1 and September 30.

• Sold 500,000 Groupons during that time.

• Grew subscribers by 27 million people

• Grew gross billings by $200mm and revenue by $38 million.

Leaving alone one stat that is hard to reconcile, here are some probably incorrect but still fun observations.

• They saw only 15% of every incremental dollar, not the 40% or 50% used in common knowledge arguments.

• Still, at a pace of $400 million per year, that is revenue in excess of $4 billion.

• With 10,000 employees, they earn $400,000 / employee. Better than we might have guessed. That they added 800 for an additional $38 million is actually above their overall average.

• Selling 500,000 Groupons in the quarter for gross billings of $1.2 billion implies an average Groupon of just over $20. Seems cheap.

• 27 million subscribers added for $38 million in revenue would make those $4/email CPA’s seem pretty high. At $4 billion in yearly revenue off of 142 million subscribers, it seems about breakeven (which of course doesn’t include payroll).

A four billion dollar per year run rate business that loses money with 10,000 mouths to feed. That’s what we have today. Is it worth almost three times revenue? At that metric it’s a bargain, especially since they haven’t finished growing. Based on what they actually earn, it’s another. Still, it really doesn’t seem that bad. Or, are we just missing something and hoping they will start to spend on new subs again?