Groupon Analysis

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  • 1. The IPO AnalysisBy: Investors Mosaicwww.investorsmosaic.comOctober 2011 Investors Mosaic, Inc.www.investorsmosaic.com

2. The Thesis Investors Mosaic, Inc. www.investorsmosaic.com 3. Dont Buy the IPO, a Better Risk/RewardOpportunity Will Present Itself Groupon is a viable business, but there are too many unknownsabout the business model to invest at such an extreme valuation The company has grown so fast it likely lacks proper human and ITinfrastructure, and is vulnerable to severe growing pains The management team is thin for such a large and complexbusiness model (currently no CTO, CIO, or COO) Company may have to hit the pause button on growth tostrengthen itself for long-term success = valuation compression Investors will face multiple rounds of stock sales in the mediumand long-term as only 5% of stock being offered Management has cashed out hundreds of millions from previousfinancings, so incentives may not align with shareholders Investors Mosaic, Inc. www.investorsmosaic.com 4. Recent Metrics Are Concerning as Growth Has Slowed, Creating Questions Around Their Ability to Grow ProfitablyTakeaway: In an effort to minimize operating losses, Groupon has slowed spending onmarketing and hiring of sales people. This has caused a significant slowdown insequential growth and calls into question the scalability of the business. Investors Mosaic, Inc. www.investorsmosaic.com 5. Key Metrics Point to Slowing Growth Investors Mosaic, Inc. www.investorsmosaic.com 6. Key Metrics Point to Slowing Growth Investors Mosaic, Inc. www.investorsmosaic.com 7. Growth Slowing as Groupon Dresses Up forthe IPO; What Happens Next?Takeaway: The million-dollar question is whether or not this is the pause that refreshes,or an indication that the business has gotten out over its skis. Investors Mosaic, Inc. www.investorsmosaic.com 8. Key Financial Metrics Featured Merchants this is the core of the business; without satisfiedmerchants, the business is not sustainable Groupons Sold shows that people like what they are offering Average Revenue per Groupon indicates relevance of deal % of Gross Billings Retained indicates perceived value of service andthe level of competition Repeat Customers indicates customers satisfaction Subscribers Provides a list of customers for Groupon to mineNote: Subscribers is a misleading statistic! This has no indication of the quality of thelead. Merchants will ultimately care about getting good customers in the door, notjust anybody. Investors Mosaic, Inc. www.investorsmosaic.com 9. Bright spots Exist for the Business Groupon is the most recognized dailydeal site Incremental profitability has improvedlately (but at the cost of growth?) Revenue per Groupon on the rise Some very smart Venture Capital firmsare involved (Accel Partners, DST, KPCB) Investors Mosaic, Inc. www.investorsmosaic.com 10. There are Several Questions Regarding theBusiness Model That Need Answered BeforeWe Can Confidently Recommend the Stock Do Groupons provide an attractive ROI for merchants? Unclear if deals are generally profitable or create repeat customers Merchants are beginning to place limitations on Groupon deals Merchants are becoming more savvy, which will limit revenue for Groupon Merchants may be unaware of the legal risk they are assuming How will merchants respond to this risk when / if gift card laws become a more prominent concern among regulators and lawmakers? Competition likely drive down margins Recent quarters demonstrates that Groupon taking smaller cuts of deal Not clear if network effects exist Larger merchant pool and subscriber base not driving scale in the business Groupons only work for merchants that have high frequency customervisits, not long-term purchases like eye glasses How big is the pool of interested merchants once the hype wears off? Investors Mosaic, Inc. www.investorsmosaic.com 11. There are Several Questions Concerning theBusiness Model That Need Answered BeforeWe can Confidently Recommend the Stock Very manual business model due to need for huge sales force toreach widely distributed merchants; unlikely to experienceeconomies of scale predicted by management. The recent quarter implies that lower spending = lower growth Unlikely to achieve 25% - 35% operating margin predicted by mgmt Reports indicate that 25% of Groupon redeemers are loyalcustomers, eating into profitable repeat business. Merchants need to figure out how to optimize Groupon offers in orderto make it a sustainable marketing offering A Rice University Study in September 2010 showed that: Groupons were profitable for 66%, not profitable for 32% 42% of the merchants would not run another Groupon deal Investors Mosaic, Inc. www.investorsmosaic.com 12. There Are Several Red Flags That Give Us Pause as Investors Groupon had to re-file their IPO prospectus twice because of accountingirregularities, indicating neglect or incompetence. Cut revenue by 50% because they reported all gross billings as revenue although Groupon never had claim to this cash stream Removed adj. consolidated segment operating income from S-1 because the SEC felt it was an inaccurate representation of on-going expenses Two Chief Operating Officers have left over the past six months, and the CTOleft in March. Groupon has yet to find a replacements. Could suggest complete lack of infrastructure at the company Something must be wrong for these people to leave right before the big IPO. Suspicious. The company is only selling 5% of shares outstanding, which should be viewedas a gimmick to get a one-day pop. VCs and employees are not cashing out on this deal, suggesting there will be substantial stock coming on the market when the lock-up expires, or new secondaries are filed. Despite the small % offering, the absolute number of shares is huge (30 million) when compared to LinkedIns 8 million offering. Investors Mosaic, Inc. www.investorsmosaic.com 13. There Are Several Red Flags That Give UsPause as Investors Two classes of shares management will own only 0.4% of shares, but control35% of the voting power. Most of this voting power resides with CEO Mason and Chairman Lefkofsky A company is still an infant only 3 years old and lacks proper infrastructurethat will need to be addressed soon, and likely to be painful. Theyve only had a CFO for 10 months No COO, CTO, or CIO Over the past three years, Groupon has hired 9.5 people per day on average! Its extremely unlikely that the company could have done this without cutting corners and hiring undesirable employees Groupon risks legal action for not properly following abandoned property lawsrelated to unclaimed gift cards, and attempts to place all the risk on themerchants. Investors Mosaic, Inc. www.investorsmosaic.com 14. Explosive Growth Has Left Several Gaps in the Companys Management Infrastructure GrouponLivingSocial Groupon has vacancies in key CEO Andrew Mason Tim OShaughnessy CIO None Val Aleksenkomanagerial positions that prevent CTO None Aaron Batalion the company from establishing a CFO Jason Child John Bax COO None Eric Eichman long-term direction and laying the General Counnsel David SchellhaseJim Bramsonfoundation for sustainable growth. VP, SalesDarren SchwartzMandy Cole VP, ProductJeffery HoldenIan Costello VP, Corporate DevelopmentJason Harinstein Jake Maas VP, Human Resources Brian Schipper Jennifer Trzepacz VP, Engineering & Operations Brian Totty None VP, MarketingAaron Cooper Camille Watson Hard to believe that such Grouponcan maintain customer service levelsafter such a massive hiring binge.Shake out likely, and during the roadshow, the CEO mentioned thattheyll be firing the bottom 10% toimprove service levels. Investors Mosaic, Inc.www.investorsmosaic.com 15. The Business Model is Not Showing MeaningfulSigns of Economies of Scale to Justify Valuation M Investors Mosaic, Inc. www.investorsmosaic.com 16. Its Hard to Tell if Groupons NegativeWorking Capital Position is Sustainable Groupon collects cash from thesubscriber before they pay themerchants, creating anattractive cash float to fundthe business. However, if growth slows ordeclines, a cash squeeze ispossible as incoming payableswill not offset liabilities. As of 3Q 2011, Groupon owesmerchants $465M. We cannot determine if this is along-term sustainable profile,so we need to analyze a fewmore quarterly reports beforemaking an assessment. Investors Mosaic, Inc. www.investorsmosaic.com 17. Investors Mosaic Survey Suggest the Daily DealBusiness is Viable, but Still Needs to be Fine-Tuned Investors Mosaic, Inc. www.investorsmosaic.com 18. LivingSocial Has Taken the Slower GrowthPath, Which May be More Sustainable LivingSocial appears to be building a better, more sustainable businessthat is focused on building a higher-quality list of subscribers. What does Amazon know that we dont? They can provide massivedistribution for LivingSocial via the Kindle platform.GrouponLivingSocialMarkets175 174Countries in Operation4525Subscribers (in millions)14346Employees10,418 3,900Markets per Country 3.97.0Subscribers per Market (millions) 0.80.3Subscribers per Country (millions)3.21.8Cumulative Deals Purchased (millions)30 22Suggests that LivingSocialas % of subscribers21%48% has more relevant dealsfor their subscribersSubscribers per Employee 13,72611,795Cumulative Deals per Employee 2,880 5,641 Investors Mosaic, Inc. www.investorsmosaic.com 19. Financials Investors Mosaic, Inc. www.investorsmosaic.com 20. Investors Mosaic, Inc. Key Metrics History www.investorsmosaic.comKey Metrics1Q102Q10 3Q10 4Q101Q11 2Q11 3Q11Gross Billings 44,38391,424194,272415,269 668,174929,249 1,157,210Revenue20,27238,666 81,779172,224 295,523392,582 430,161Gross Billings Per Sales Person 34771124161 188192 238Revenue Per Sales Person15830 52 6783 8189New Subscribers1,627,332 7,010,911 10,924,087 29,214,19732,516,20132,617,29327,148,537Subscribers3,434,61010,445,521 21,369,608 50,583,80