So you want to buy Groupon stock but you’re grappling with a few nagging concerns? Welcome to the club. Wednesday is pizza and punch night.
To be frank, you’re not alone. I love Groupon. I love the deals, I love the pranks, I love the weird press releases they put out sometimes. I love it all. But you can’t invest in a company just because the owner occasionally puts on bronzer and gives himself a weird bouffant hair style before he takes the stage to announce a totally fake promotion (like GrouSpawn). Investing takes serious research and careful consideration. And as someone who is incapable of making a decision on anything, I’ve made up a point/counter-point list of reasons for why you should and should not invest in Groupon.
You should invest in Groupon because…
The company has grown at an unprecedented rate—so fast, in fact, that some are calling it the fastest growing company in Web history. In two and a half years, the company has exploded from a modest 400 subscribers in December 2008 to more than 83 million subscribers today, and its revenue has been even more impressive. In 2009, Groupon made $30.47 million in revenue. One year later, revenue skyrocketed more than 23x to $713.3 million in revenue, and it’s already on track to more than triple that this year. In the first quarter of 2011, Groupon made $644.7 million in revenue.
Groupon has some funky accounting practices. The company explains how it calculates its revenue and gross profit thusly: “Our revenue is the purchase price paid by the customer for the Groupon. Our gross profit is the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.”
In other words, when Groupon totals up its revenue for all Groupons sold for the year, it’s including the merchant cut as well. Take out the merchant cut, and you have Groupon’s gross profit. Add in the usual cost of operations, and you have net income. So…essentially…Groupon’s gross profit is actually its revenue, and its net income is what’s left over after operating expenses (it looks like Groupon came to its original calculation by lumping in the merchant cut as an operating cost).
So what is Groupon really taking home after it divvies out the merchant’s cut of each deal? In 2010, Groupon took home approximately $280 million, not $713 million. And in Q1 2011, Groupon’s cut of the Groupons sold totaled $270 million.
But (counter-point within a counter-point) that’s still not bad when you consider that in 2009, Groupon’s “gross profit” (aka revenue) was only $10.9 million. So the company's revenue HAS grown quite remarkably--more than 24x, actually. It's just not as high as it appears at first glance.
You have the daily deal industry as a whole, which analysts agree is a hit. But it’s such a new industry; how do you accurately gauge the future of daily deals? Is the daily deal industry here for good, or was it just a quick-fix solution to bad economic times?
“Daily deals feel more like spam than social networking, but they are here to stay,” said analyst Dan Miller of Opus Research. “In other words, the number of registered people signed up to receive the emails will continue to grow, with many people signed up for multiple services.”
So, no, the clones aren’t going anywhere. If anything, they’re getting validation from the Groupon IPO (DealFrenzy’s acquisition by Intertainment Media; Juice in the City getting $6 million in funding, etc.). And there’s still plenty of room for all in the niche markets.
Will the daily deal industry stay strong after the economy gets back on track? Most likely. The fact is that daily deal sites like Groupon don’t just appeal to the frugal shopper.
“Sites like Groupon are attracting people that are deal-sensitive, not necessarily loyal. They see it like a game and they’re drawn based on impulse…they’re seeking the next thrill,” said analyst Jeffrey Grau of eMarketer. “They’re very different from the type of people who shop on online coupon sites—those are disciplined shoppers who plan a trip to the grocery store and go on coupon sites to get discounts on the items they want—they take a much more tactical, surgical approach to getting the deals they want and they’re more loyal to their retailers. The daily deal customers are much more impulsive.”
It sounds harsh, but that should actually put a lot of hopeful Groupon investors at ease. Groupons are not like coupons—they’re more like impulse buys, and there will always be a big market of people who simply like the thrill of getting great deals.
On Groupon’s future, Miller theorizes: “The business metrics will look a lot like tried-and-true direct marketing and couponing, with relatively low conversion rates, low engagement (in terms of time spent). Over time Groupon will get more focused on its ‘active’ users and have a lot of data on their purchasing activities and then get better at delivering targeted offers. Because of its size, scale and longevity, it may be better than its predecessors in direct marketing, daily deals and couponing.”
So, I hope this list of the pros and cons of investing in Groupon has helped you on your way to deciding whether or not to become a Groupon investor. But it probably hasn’t…I’m sorry.
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