Bubble Bursting 2.0 (Part 2): Isn’t Groupon Worth Something?

Last November, in a post entitled “Numbers Behind Groupon’s Business Warrant Caution After First Day Pop”, I cautioned investors that the IPO of daily deal leader Groupon (GRPN) looked sky-high at the initial offer price of $20 per share, which valued the company at an astounding $13 billion:

“It is not hard to understand why skeptics do not believe Groupon is worth nearly $13 billion today. To warrant a $425 per customer valuation, Groupon would have to sell far more Groupons to its customers than it does now, or make so much profit on each one that it negates the lower sales rate. The former scenario is unlikely to materialize as merchant growth slows. The latter could improve when the company stops spending so much money on marketing (currently more than half of net revenue is allocated there), but who knows when that will happen or how the daily deal industry landscape will evolve in the meantime over the next couple of years.

Buyer beware seems to definitely be warranted here.”

A few things have happened since then. First, Groupon has cut back on marketing spending and is now making a profit (free cash flow of $50 million in the second quarter). Second, the post-IPO insider lockup period has expired, removing a negative catalyst that the market knew was coming. Third, and most importantly, Groupon’s stock has plummeted from a high of $31 on the first day of trading ($20 billion valuation) to a new low today of $4.50 ($3 billion valuation).

Here is my question, as simply as I can put it; “Isn’t Groupon worth something?” The stock market seems to be wondering if many of these Internet IPOs will exist in a few years. Today’s 8% price drop for Groupon was prompted by an analyst downgrade to a “sell” and a $3 price target. Here is a company with $1.2 billion in cash, no debt, and a free cash flow positive business that will generate over $2 billion of revenue this year. That has to be worth something. How much is another story.

I would argue that it is too early to write off companies like Groupon as being “finished.” It is far from assured that they will be around in 3-5 years, but many of them have huge cash hoards ($2 per share in Groupon’s case), no debt, and a business that is making money today. My most recent blog post made the point that many of these Internet companies are going to survive, and in those cases bargain hunters are likely to make a lot of money. Will Groupon be one of them? I don’t know, but if an investor wanted to make that bet, at $4.50 per share, they are paying about $1.8 billion ($3 billion market value less $1.2 billion of cash in the bank) for an operating business that is on track for more than $2 billion in sales and $200 million in free cash flow in 2012. And who knows, with this kind of negative momentum, the shares could certainly reach the analyst’s $3 price target in a few more days.

Bottom line: these things are starting to get pretty darn cheap. If they make it, of course.

Full Disclosure: No position in Groupon at the time of writing, but positions may change at any time.

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2 Thoughts on “Bubble Bursting 2.0 (Part 2): Isn’t Groupon Worth Something?

  1. 3-5 years seems to me a very short life span for a public company.

    I am not an expert, but it seems to me that *any* public company with perceived lifespan of 3 to 5 years will get beaten rather badly.

    Like RIM, for example 🙂

    In regards to this, my logic is that their valuation would start raising not so much based on one or two quarters of raising profits, but from an eventual change of perception about their future.

    Most people – like me , by the way – just believe that since content is king and since electronic devices become smarter and smarter – the niche for middle-men between the content owner and the consumer will continue to get thinner and thinner.

    It won’t disappear, though, and with some chance NF can position itself as an operator or solution provider to some of the bigger content owners who’re too lazy to do it all.

    I like their growth strategy because it makes them appropriate for a target at some point when business becomes too competitive.

    Vonage are still waiting for such an opportunity to materialize though…and it’s been quite a while.

  2. Aye, aye…important correction: first two paragraphs of the previous post are for Groupon, the rest is for Netflix…don’t know why I mixed them up…sorry about that 🙂

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