Wedbush Groupon Analysis

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  • 8/4/2019 Wedbush Groupon Analysis


    The information herein is only for Accredited Investors as defined in Rule 501 of Regulation D

    under the Securities Act of 1933 or institutional investors.

    Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, inveshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Inves

    should consider this report as only a single factor in making their investment decision. Please see page 16 of this reor analyst certification and important disclosure information.

    Wedbush Securities 1000 Wilshire Blvd., Los Angeles, CA 90017 (213) 688-8000 Member NYSE/FINRA/SIPC

    The Second Internet (formerly The Week in Social Media)

    June 6, 2011


    Lou Kerner


    (212) 668-9874

    Social Media is changing the world to a far larger degree than Wall Street currently appreciates. We refer to the emerging Social Interas The Second Internet. We believe that for the foreseeable future, the news flow on the Second Internet will be highly positive.

    To keep investors abreast of the latest developments in the sector, we publish this newsletter on all things Social.


    THE WEEK IN DEAL COMMERCE Groupon Announces IPO Revealing Rapid Growth, Significant Losses, and

    Deteriorating Operational Metrics Mobile Rollouts, Partnerships, and Acquisitions Highlight Busy Week in Rapidly

    Evolving Deal Commerce Space

    THE WEEK IN FACEBOOK Wedbushs 3rd Social Media Survey Finds Membership and Engagement Still

    Growing for Social Networks in U.S., Privacy Remains a Major Concern Facebook Continues To Grow Lobbying Team

    THE WEEK IN TWITTER Twitter Distributes Follow Button Across the Net Twitter Taking Control Over Its Ecosystem

    THE WEEK IN SOCIAL GAMING Gaming Data for May Kabam & wooga Raise Over $100 MM

    THIS WEEK IN PRIVATE SHARES TRADING As Public Equities Trade Down, Facebook Reaches Highs, Valued at $77.8 B


    Subscribe to this publication click here:p://

  • 8/4/2019 Wedbush Groupon Analysis




    When Google introduced AdSense in 2003, the concept was simple: Combine the search experience with the unparalleled trafficmonetization of Google.coms pay-per-click model to present contextually relevant paid links all around the net.

    Since that introduction, AdSense has become part of the monetization toolset on millions of websites, in addition to over 50 millionparked domain names around the world. (A parked domain is a website that exists simply to monetize the direct navigation traffic

    through Google AdSense.) In 2010, Google earned roughly 30% of total revenue through Ad Sense.

    AdSense spread rapidly because it is such a powerful tool for monetizing from Internet traffic. There has never been a true competitoto AdSense for monetizing traffic on many Internet sites. Until now

    We think Deal Commerce can become the first true alternative/complement to Google AdSense for monetizing large swaths of Internetraffic.

    We believe that Deal Commerce is not a passing fad, but rather, the category is emerging as a major new commerce experience drivenby the ease with which local merchants can leverage the Internet for the first time. Its the early days and there will be rapid markeshare gains and losses as the ecosystem evolves to best serve the needs of merchants and consumers. But given the ability tounearth significant revenue, we believe Deal Commerce may become as ubiquitous as AdSense.

    Groupon Files S-1, Revealing Rapid Growth, Significant Losses, and Deteriorating Operational Metrics

    On Thursday June 2nd, just six months after spurning Googles $6 billion buyout offer, Groupon, the global leader in the DeaCommerce space, filed its S-1 in anticipation of an IPO that will reportedly value the company at between $20-$30 billion (the last tradeof Groupon shares in the private market occurred in March and valued the company at $7.4 billion).

    In our view, the most notable parts of the S-1 filing were:

    1. Rapid growth: Groupons Q1 11 revenues of $645 MM were up an astounding 1457% over Q1 10. While there were someacquisitions, the significant majority of the growth was organic. Subscribers grew even faster at 2,419% year-over-yea(although buying customers only grew 1,800%). Groupons sold grew 1596%.

    For context, here are revenue growth metrics from first full year to first full second year:

    Google: 352% from $19.1 MM to $86.4 MM, Amazon: 838% from $15.7 MM to $147.8 MM

    Salesforce: 128% from $22.4 to $51 eBay: 724% from $5.7 MM to $47.4

    Figure 1: Groupon Subscriber Growth Q2 2009 Q1 2011

    Source: Groupon

  • 8/4/2019 Wedbush Groupon Analysis



    2. The medias reaction to the losses & growing marketing spend: Groupon has gotten roasted in the press for its significanincrease in marketing spend, which ballooned to $208 MM in Q1 11 (which included a controversial Super Bowl ad), versus amarketing budget of just $4 MM in Q1 the prior year. The WSJ called the spending crazy and Forbes cited the massive 64%net loss. The company was also criticized for the significant amount of insider selling to date.

    3. The overall operational metrics are generally trending downward: Revenue per Groupon deal sold in Q1 11 dropped 8.7%year-over-year to $22.95. The number of Groupons sold per merchant declined 21% year-over-year to 612. Groupons gross

    profit fell from 45.2% in Q1 09 to 41.9% in the latest quarter (highlighting merchants are receiving a larger share of therevenue generated in an increasingly crowded marketplace).

    4. The metrics in its first city, Chicago, are also weakening: Groupons sold per customer per quarter started at 2.71 in Q3 09, inChicago, and reached a new low of 1.65 in Q1 11. Revenue per customer per quarter started at $94.92 in Q3 09, and stoodat $39.53 last quarter. The same buyer-fatigue appears in foreign cities, with Berlins revenue per customer per quarter fallingfrom $150 in Q3 10 to $111 in Q1 11.

    One of the more thoughtful pieces analyzing Groupons metrics in Boston can be found at by Yipit, a leadingdeal data aggregator.

    Even with the deteriorating metrics, however, we believe Groupon is still likely a very solid business. Groupon, and the entire DeaCommerce industry, are just too young, and the industry is changing too rapidly, to have strong confidence in an appropriate valuationInvestors will have to make assumptions and here are a few things we think investors should consider when looking to invest in theDeal Commerce space:

    1. The Deal Commerce space is going to be massive: As we mentioned above and discussed in detail in our Initial DeaCommerce Report, Groupon and the rest of the industry has grown so rapidly because, for the first time in history, merchantscan leverage the Internet in scale. We also have an appreciation for the simple fact that many people love a deal. As a resultwe believe Deals will become ubiquitous around the net. We believe Deals are the new AdSense.

    2. Groupon will be one of the leading players: Groupons current dominant scale, continued and grab mode, and apparenprogress in most of the future key drivers of success, give us confidence that the company will remain a leader in the space forthe foreseeable future. Detractors repeatedly cite limited barriers to entry in Deal Commerce as a significant risk, but thesame could be said of e- commerce in general, and we note that Amazon leveraged scale and great execution to sustain itsleadership position.

    3. The Deal Commerce space will be hyper competitive: LivingSocial is a formidable competitor. New entrants like GoogleAmazon (early on in a partnership with LivingSocial) and Facebook will all likely take meaningful pieces. Microsoft will likelyenter the space shortly. Other players like Travelzoo and white-label provider Tippr will also take their share. Foursquare and

    other mobile companies will be players. Clearly, thousands of niche players like Lot18 (for wine) will take a share of the DeaCommerce pie. Ultimately, we believe every major retailer and media company will need to have a Deal Commerce strategyand will be fighting for their share of the Deal Commerce revenue pie.

    4. Technology will play an increasingly important role: We believe self-serve provisioning of deals by retailers will be animportant part of the future and this will require simple and scalable toolsets. Deals will become increasingly personalized andcontextualized, which requires large data sets and the ability to intelligently parse them. Social will play an increasingly largerole in the success of the leading providers, whereas today email is the key distribution platform. Mobile integrations to allowdeals to be pushed to subscribers, or subscribers to search for deals based on location, will play an increasingly meaningfurole in this landscape. Providing seamless, scalable, social, cross-platform solutions for merchants and consumers is adaunting task, but the companies that get this right will be creating significant shareholder value.

    5. Partnerships will play an increasingly important role: In a world in which Deals are ubiquitous, partnering will be a major part oachieving scale. Groupon is leading here with its recent partnership with Tencent to get into China (announced in February)and more recent deals with Expedia for travel and LiveNation for events. LivingSocial is partnering too (with Fairfax Media inAustralia just last week). White label solutions will be one way for smaller web properties to garner scale in the space, bu