BI Research Express 11/4/2011

Groupon Goes Public! Here’s What Investors Need To Know
Groupon goes public today. We have done lots of research into the company over the years, and here’s a summary of the IPO and the company. 

The IPO
Groupon is pricing at $20, above its original $16-18 range, for a market cap around $15 billion. The IPO is reportedly 10X oversubscribed. So who knows what it might do today. (Our bet? Huge pop, lots of volatility and craziness. But of course, no one knows.)

The Stock
It’s very, very expensive. While we believe Groupon is a real, attractive business (more on which below), we see it experiencing decelerating growth as it goes from hypergrowth to profitability, which should hammer the stock at least in the short term. But, anything could happen and this certainly isn’t a recommendation to do anything.

Our thoughts on the stock price →

The Company
We believe Groupon is a real business with an amazing opportunity ahead of it and will eventually build a great franchise. There are, however, several red flags investors should be aware of. Here’s the key points, per our analysis:

  • Groupon is almost profitable now, and it will likely be nicely profitable over the long haul.
  • Groupon’s revenue growth over the last few years has been remarkable, but…
  • Groupon’s growth is decelerating rapidly as the company cuts marketing spending in a drive to become profitable.
  • Groupon’s growth is also decelerating because 1) the company has picked the low-hanging fruit in many key markets, 2) competition is intensifying, and 3) the company’s product-mix is reducing the percentage of gross coupon sales that it keeps.
  • Groupon’s core business, local daily deals, actually shrank in the US in the third quarter, a startling and concerning trend.
  • Deceleration and product transitions usually clobber stock prices, and Groupon’s stock will likely continue to get clobbered until the transition is finished.
  • Once Groupon’s growth rate stabilizes, [we] think it will eventually settle into a ~20% long-term growth rate.

Our latest, full analysis of Groupon’s business, in glorious charts →

Other Points of Note

  • Our investigative report into Groupon’s explains the company’s origins, its missteps, executive turnover, and how its salesforce is being whipped into shape by the German entrepreneurs who joined the company with Groupon’s European acquisition CityDeal. If you haven’t, go read it →
  • Groupon Now, the product which Groupon believes will be its future, is not growing.
  • We believe the history of massive insider selling at Groupon raises questions of corporate governance and agent/principal interests for potential investors. While there is nothing wrong with company founders “taking money off the table” in some circumstances, Groupon’s behaviour in that regard has been among the most extreme we’ve seen.
  • Investors should also be aware that Groupon insiders have “super-voting” shares that will award them 60% of the votes after the IPO. 
  • Groupon’s #1 competitor, LivingSocial, has been on a roll and its catching up seems possible. 
  • Groupon’s Chinese joint venture is a disaster.

LinkedIn beat expectations again. Revenue was $139.5 million vs. $128 million consensus, EPS Loss of $0.02 GAAP vs. loss of $0.04 GAAP consensus and 131 million members. The company also announced a $500 million stock offering of mostly secondary stock.

Buyout firm TPG Capital has begun formal due diligence into Yahoo, Dealbook reports.

Yahoo is close to selling its Japanese assets, according to a report in AllThingsD.

Apple offered CBS a split on advertising revenues to be part of Apple TV. CBS turned them down. Networks get huge upfront cash payments from telcos, and that’s what they want. Apple (or Google) certainly has the cash to do this, but they are understandably reluctant.

Zynga launches a new game, CastleVille. As their bookings/users dip last quarter showed, Zynga is a hits-driven business and they need to keep publishing new games to hold the business up.

DON’T MISS OUR REPORT: The Way Companies Are Getting Financed Is Completely Changing →

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