And Now Another Analyst Says Groupon Is Worth Less Than The IPO Price...

Groupon Sequential Growth

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Well, that makes three of us.Last week, I ran some numbers on Groupon and concluded that the company was probably worth $6-$9 billion, well below its contemplated IPO price.

Given the risk in the company’s transition to profitability–chopping back marketing spending, revenue deceleration, intense competition, backlash against the product–this led me to conclude that the stock wouldn’t really offer a compelling value unless it were valued at $5 billion or below. So I said that, if I were a big institutional investor, I’d place a huge order for Groupon’s stock, and then sell it after the opening pop.

(Yes, this would entail some risk–the underwriters might blow it and price the stock too high–but there’s no free lunch.)

Then Jim Cramer came out and said pretty much the same thing: The company’s numbers looked “dressed-up” for the IPO, the IPO was being “engineered,” and he’d take shares at the IPO price and then flip them immediately.

And now a bona-fide Wall Street analyst, Ken Sena of Evercore, has come to a similar conclusion.

Ken’s a bit more optimistic about Groupon’s long-term profit margins than I am–he thinks the company can eventually hit a 30% operating margin vs. my estimate of 15%–but he’s actually more pessimistic about revenue growth. Ken thinks Groupon will only be able to grow at about 20% per year for the next several years, whereas my preliminary estimate was 20%-30%.

Anyway, when Ken runs his numbers, he comes out at a value of $8-$10 billion for Groupon, which is still below the company’s currently contemplated IPO price. Right now, the company has set a price of $10-$11 billion, with a presumed trading value of $12 billion or so, but it is reportedly considering raising this price.

So that’s three of us.

Where Groupon’s stock ultimately settles, of course, will be determined by millions of investors the world around, and the consensus guess of millions is generally more accurate than the consensus guess of three.

For what it’s worth, I also think the riskiest time for the company will be early next year in Q1. I assume the analysts at the underwriters will publish lowball estimates for Q4, which will allow the company to “beat expectations” in its first quarter, no matter how lame the quarter is. But by Q1, if Groupon is to justify a $12+ billion trading price, the company will have to truly surprising on the upside. And that will be right as the full impact of the cut in marketing spending, plus a seasonally weak quarter, will be hitting the company.

Here are Ken Sena’s bullets on the company:

We estimate net revenue growth of 19% on a sustained growth rate over the next five years, well below the explosive net revenue growth Groupon has demonstrated to date, as we anticipate lower-take revenues from its newer platform initiatives, such as Groupon Now! and Groupon Goods, in addition to waning core performance.

Take pressure the result of mix and competition . In terms of mix, we estimate Groupon Now! and Groupon Goods will ultimately come to represent approximately a third of Groupon’s gross billings over the next six years while contributing ~20% of the revenues as take-rate (i.e., the portion of the Groupon voucher amount that Groupon keeps) is roughly 15-20% vs. ~40% on its core daily deals.

Takeaway: we believe Groupon’s business will ultimately need to adopt a less intensive sales force model. As such, we believe the success with which Groupon can make the transition from sales-force-driven model to local-commerce self-serve platform to be the key question that still needs to be answered by investors.

Valuation Framework Provided. While we do not specifically provide a target price forecast (given that we do not officially cover the stock), we do lay out an investment framework for our clients who are considering subscribing. Based on this work, we assign a valuation range to Groupon in the $8 to $10 billion range. However, we see upside to this valuation estimate should Groupon’s model demonstrate less staffing intensity in favour of a more self-serve approach. Moreover, while we recognise the importance of the sales force in helping the company build a moat from the competition, we do not see its current spending as sustainable given our expectation for ultimate take-rate decline. As such, we believe the success with which Groupon can make the transition from a sales-force-driven model to a local-commerce self-serve platform as the key question that still needs to be answered by investors.

SEE ALSO: I Wouldn’t Touch Groupon In The After-Market With A 50-Foot Pole

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