Ever since it became fashionable to trash Groupon (and it has become VERY fashionable), the response from the company’s supporters has been that it’s “the next Amazon.”
Amazon was subjected to the same knee-jerk scepticism and hate for much of the late 1990s, Groupon supporters point out.
Back then, Amazon sceptics said that Amazon “could never make money,” had “no real competitive advantage,” and was “going to go bankrupt.”
And now look at it!
Also, Groupon supporters point out, Amazon had the same wonderful cash-flow engine that Groupon has, in that it gets paid by its customers long before it has to pay its suppliers. And this cash-flow engine has allowed Groupon to grow spectacularly while consuming almost no capital, just the way Amazon once did.
Contrary to the dismissive howls of the Groupon haters (who have grown quieter since the company’s near-profitable Q3 and successful IPO), these Amazon-Groupon comparisons are valid.
Photo: Scott Beale / Laughing Squid
Amazon was hated in the late 1990s. Many smart people did think Amazon could never make money and was going to go broke. Many smart people were convinced that Amazon had no competitive advantage.And now Amazon has a $100 billion market cap and is the global leader in ecommerce.
So that should teach you to take even smart sceptics with a grain of salt and make your own judgements.
But, still, there’s a big problem with the Groupon-is-the-next-Amazon meme, at least when it comes to Groupon’s stock.
The problem is NOT the following point, which Groupon haters cite when they scoff at the comparison:
- The idea that Andrew Mason is no Jeff Bezos. Based on my interactions with Andrew Mason, he’s a lot smarter than people think he is. Now that Mason has finally dropped his “wacky guy” schtick, moreover, his prodigious intelligence should start to become clear to people. He may not be as smart and talented as Jeff Bezos, but if he isn’t, few people are. And he’s plenty plenty smart and talented. (Also, Bezos hadn’t run a huge company before, either, so don’t fall back on that one). And there are other folks involved at Groupon who are also plenty smart and talented, including several ex-Amazon folks. And they can now afford to hire a lot more people who are smart and talented.
No, the real problem with the Amazon-Groupon comparison is this:
When Amazon went public, it was valued at ~$500 million
When Groupon went public, it was valued at ~ $20 billion
The upside on an investment in a company valued at $20 billion is vastly less than an investment in a company valued at $500 million.
Specifically, when Amazon finally reached a market value of $20 billion, which first happened about 18 months after it went public, it had already delivered a 40X return. Now that Amazon has a market capitalisation of $100 billion, it has delivered a 200X return from its IPO (ignoring dilution, of which there has obviously been some).
If Groupon were to become “the next Amazon” in market capitalisation, and trade at a $100 billion valuation, it would deliver a 5X return from today’s levels.
There’s a big difference between at 5X return and a 200X return.
So contrarian Groupon investors hoping that Groupon will make them as rich as it made contrarian Amazon investors need to realise that that, in this very important respect, the companies could not be more different.
(Groupon investors already got that amazing 40-bagger $500 million to $20 billion return…but it went to them, not you.)
Now, this doesn’t mean that Groupon can’t still be a good investment. It can. It just means that it can’t still deliver the kinds of returns that Amazon delivered to its early public investors.
And there’s one other thing that’s very different about Amazon and Groupon that should worry Groupon investors: Even in Amazon’s darkest days, Amazon customers LOVED Amazon’s product. Some of Groupon’s customers clearly love Groupon’s product, but many vocal ones do not. So Groupon is likely to have to refine its product over the next couple of years.