Groupon IPO Raises Questions About Losses Listed in Filing

By Chuck Sudo in News on Jun 4, 2011 4:00PM

So Groupon filed its IPO prospectus Thursday and that's all well and good. But the numbers catching the attention of everyone isn't the projected $750 million they're expected to raise, but the losses Groupon has posted as it implemented the aggressive expansion plan that led financial analysts to breathlessly call it "the fastest growing company in history." (You can read the prospectus here.)

What's been giving analysts the most cause for alarm is the losses Groupon has accrued. Posting a loss of $103 million for the first quarter of 2011, and a cumulative loss of over nearly $604 million, will do that.

The prospectus does its damnedest to accentuate the positives:

We increased our subscriber base from 152,203 as of June 30, 2009 to 83.1 million as of March 31, 2011.

We sold 116,231 Groupons in the second quarter of 2009 compared to 28.1 million Groupons in the first quarter of 2011.

We grew from 37 employees as of June 30, 2009 to 7,107 employees as of March 31, 2011.

The Awl's Choire Sicha provides some balance.

Also? Net loss, before taxes, for all of 2010? $456 million. They lost $146 million last quarter. So yes, last year they lost more than half the value of this year's planned $750 million IPO. Sure, some of that was acquisition, but... what??? (Also: $750 million equals just about one year's worth of operating expenses there.)

This is a company that already sold shares to third-party investors for $946 million in cash. (Where did that go? "Almost all of it went right back out the door, to employees and early investors.")

Analysts across the country are surprised at the level of overhead Groupon is working under. But it doesn't take a Masters in Business to see that a company that expands its employee base over 19,000 times over in a nearly two-year period isn't doing so simply because of a skyrocketing demand for half-off a mani-pedi. Bill Buhr, an IPO strategist for Morningstar, told Crain's, “At some point growth slows down and your financials are upside down.”

A commenter to the Awl post provided more sobering numbers to the Groupon IPO.

Last year they brought in $279 million selling groupons (after paying vendors their cut). They spent $263 million on online marketing (to woo new subscribers), $203 million to purchase companies doing similar things and $233 million on overhead (salaries, cost of sales, etc).

In the filing, they try to make the argument that the acquisition costs and marketing costs are more like 'one-time' expenses so if you back those out they actually made a profit last year of $60 million.

The real question now is, if these are indeed "one-time" expenses, can Groupon be profitable in the long-run? Or is the IPO an attempt for CEO Andrew Mason and his partners to pad their golden parachutes? The numbers also make one wonder if Google's interest in Groupon came with caveats such as a financial audit. If it did, then Groupon's rejection of the offer is less a case of "Whaaaaaaat???" and shifts instead to the worse PR fallout of a Google "thanks, but no thanks."

The prospectus filing has also brought about some "I told you so"'s from some persistent, and well-informed critics.

Another analyst went so far as to compare Groupon's business model to Bernie Madoff.

Why is Groupon not merely a tech-bubble datum but a Ponzi scheme? Simple: Groupon has found that you can get local merchants to try anything once if it brings them new customers. A few local merchants in Chicago get them started, and Groupon shows good revenues. In fact, Groupon immediately remits half of those “revenues” back to the local merchant — they were never Groupon revenues in any meaningful sense of the word. But, optically, Groupon revenues look high — which they use to raise a financing round at a high valuation. Then they use the proceeds to hire vast armies of salespeople to dig deeper into Chicago’s local merchant community and repeat the trick in other cities.

Meanwhile, many early-adopting merchants find that the burst in customers immediately disappears, and since they can’t perpetually discount 75%, those merchants stop using Groupon. But Groupon’s sales force adds many more new merchants than it loses (for now). And Groupon goes out and raises another round at an even higher valuation; they hire even more salespeople and expand into even more virgin territory. Lather, rinse, repeat.

All of these factors make one wonder if buying stock in Groupon is wise.

High valuations for many of the big tech companies like LinkedIn, Facebook, and Twitter make sense due to those companies’ incredible network effects and the fact that, fundamentally, these companies are creating value and will get better over time at monetizing that value. Net-net, Groupon is unsustainably destroying value and will implode sometime in the next five years. When that happens, it will almost certainly, and totally unfairly, wreak havoc throughout the tech ecosystem.