Amid all the bellyaching about how much money Groupon is losing and how bogus its “adjusted” accounting is and how outrageous it is that insiders have already cashed out while starving the company of cash, one fact has escaped notice.Groupon is cash-flow positive.
What does that mean?
It means that, even though the company is “losing money” on its GAAP income statement (GAAP = Generally Accepted Accounting Principles), it is generating cash from its business. And not from some bogus accounting trick, either.
We’ll get to how and why in a moment.
Yes, Groupon’s “Adjusted Accounting” Is Bogus
sceptics are right to trash Groupon for its adjusted “CSOI” accounting, which urges investors to ignore the oceans of money the company is pouring into marketing expenses and pretend instead that the company is profitable. Groupon’s argument, that this money is just going to “acquire subscribers” that will then reap returns for years, has been made before by dozens of companies, and it is always justifiably ridiculed.
All companies would look vastly more profitable if they ignored marketing costs. Groupon is way too young a business to have any idea what the “lifetime value” of a subscriber is, or even what a subscriber’s “lifetime” is. Also, the instant-deals industry is now getting so competitive that the cost of acquiring subscribers is going up, and the value of the new subscribers is going down.
So to tell investors to just ignore your biggest and most important cost–and to claim that you are somehow “profitable” when you aren’t–is preposterous.
And Groupon’s Already Huge, Which Leaves Much Less Upside
There’s also another huge problem with the Groupon investment story that most folks have missed, which is the sheer size and value of the company.
Groupon bulls often compare the company to Amazon. In some ways, this comparison is smart. In other ways, however, it isn’t.
When Amazon went public back in 1997, its financials and story had much in common with Groupon’s. Amazon was growing extraordinarily quickly, but a huge, vocal group of sceptics thought Amazon’s business was a fundamentally flawed “commodity” and that it would “never make money.” (Seriously, do a news search on the late 1990s. The number of smart people who were dead wrong about Amazon is shocking). Amazon was also “losing money” on its income statement, but actually generating cash as it grew (something the Amazon believers understood).
So Groupon had that in common with Amazon.
The big difference between the two companies, however–one that Groupon bulls often ignore–is that Amazon went public at a ~$500 million valuation and Groupon is going public at a ~$25 billion valuation. As a result, Amazon’s IPO valuation left a lot more room for spectacular upside than Groupon’s does.
Specifically, 14 years after Amazon’s IPO, the company’s market value is about $85 billion. That’s 170X the company’s value at the IPO.
Now, let’s say hypothetically that Groupon is such an amazing business that it will eventually be worth as much as Amazon is. If Groupon goes public at a $25 billion valuation and eventually trades at an $85 billion valuation, folks who buy on the IPO will make a whopping ~3X their money (vs. 170X for Amazon). And that’s if Groupon is the next Amazon–which Amazon itself, and its partner Living Social, may have something to say about.
(To be worth as much as Amazon is, by the way, Groupon will have to generate as much cash as Amazon does. Amazon generated $2.5 billion of free cash flow last year. Groupon, meanwhile, generated $72 million. So Groupon has a ways to go.)
So, Groupon is like Amazon in some key ways that many bears miss. But it’s also very different from Amazon in some key ways that the bulls miss. Namely, that the Groupon valuation tree has already grown to the sky.
And now back to Groupon being cash-flow positive…
How Groupon Generates Cash While Losing Money
A company’s “income statement” is designed to reflect the performance of a company’s business operations in a specific period–usually, quarters and years. Income statements do NOT, however, reflect the company’s CASH FLOW in the period. Income statements use concepts like “amortization” to spread revenues and costs over the periods in which they apply, rather than simply illustrating the cash the company has received and the cash the company has spent.
Income statements are what most folks who look at companies focus on. They are also the usual measure of whether a company is “profitable” or “losing money.”
As anyone who has ever run a business will tell you, however, the income statement isn’t nearly as important as the cash-flow statement.
Because the cash-flow statement reflects the actual cash flowing in and out of the company’s bank account. And that, in turn, determines whether you are “generating cash” (heaven) or “burning cash” (hell). The former condition means that you control your own destiny. The latter condition will eventually require you to raise more cash or go bust.
Many companies–media businesses dependent on traditional advertising, for example–consume cash even when their income statements show that they are “profitable.” This is because the companies book their ad “revenue” long before they collect the cash from their advertiser clients.
Other companies, however–Amazon, for example–collect cash from their customers at the same time that they book their revenue (or even earlier, in some cases), and long before they have to deliver the cash to the suppliers of the products they are selling. These companies often generate cash even when they are operating at an income statement “loss.”
Groupon is one of these companies.
Groupon Has A “Positive Cash Cycle,” Which Most Companies Don’t
Groupon sells “Groupons” that allow its customers to eventually go and get something from the merchant that issues the Groupon.
When Groupon sells a Groupon–say, a $25 coupon for $50 of belly-waxing services–Groupon collects the $25 immediately (from the subscriber’s credit card). Then, sometime later, the subscriber generally goes to the belly-waxing salon and gets his or her belly waxed. And, sometime after that, Groupon remits a portion of the $25 to the belly-waxing salon.
What this means is that, when Groupon is growing rapidly, as it is now, it collects a ton of cash from its subscribers long before it has to deliver some of the cash to its merchant partners. And that generates positive cash flow.
This is how Groupon can generate cash even when it is “losing money” on its income statement.
The full-year cash flow statement for 2010 illustrates this.
Groupon “lost” $413 million in 2010 on its income statement. In the same year, however, it generated $72 million of cash.
How did it do that?
Let’s look at the income statement first, and then at the cash flow statement.
Here’s the income statement (the numbers are hard to see, but the details are unimportant, so don’t squint. Just note the huge “loss” at the bottom):
Photo: Groupon SEC filing
And now here’s the summary cash flow statement. Note the difference: The bottom line is positive!
Photo: Groupon SEC filing
What’s going on there? An examination of the detailed 2010 cash flow statement (not pictured) explains.
Of Groupon’s $413 million loss in 2010, $203 million was a non-cash “acquisition-related” expense. (This may or may not have been a stupid destruction of asset value, but it didn’t consume cash.) So the actual operating loss was about $210 million.
Not reflected on the income-statement, however, was the fact that Groupon collected $149 million of cash from subscribers that it owes to merchants and has not yet paid them. And that, combined with another ~$95 million or so of cash the company generated from items that it expensed on the income statement but has not yet paid for, put it into the cash-flow black.
Bottom line, Groupon generated about $86 million of cash from operations in 2010 and spent about $14 million on “property, plant, and equipment” (computers and offices). Netting those two, the company generated $72 million of cash in 2010.
It was a similar story in Q1. Despite “losing” $146 million in Q1, Groupon actually generated $7 million of cash from its business: $18 million of positive cash flow from operations, less $11 million spent on property, plant, and equipment.
The benefit of positive cash flow is that Groupon’s operations can fund the company’s growth even while the company is losing money.
Of course, the benefits of this positive “cash-cycle” won’t last forever. When Groupon’s growth slows, the cash that it has to deliver to the merchants that did Groupons last quarter will start to equal (or even exceed) the cash that Groupon collects from customers who buy Groupons this quarter, and the company’s cash-flow statement will look more like its income statement.
(Amazon went through this transition, too, and it can be a painful one.)
In other words, at some point, unless/until it turns profitable on an income statement basis, Groupon will have a cash hole to fill. And the only way it can sustain its positive cash flow while losing money on the income statement is to keep growing rapidly. If the growth stalls before the company turns profitable, cash flow will turn sharply negative.
But, for now, even though Groupon is “losing money,” it is generating cash. And it can use this cash to fund operations and growth.
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