Pre-IPO Thoughts on Groupon

Like so many, we have been following Groupon's rapid growth and current IPO-related hubbub.   

There has been a lot of insightful and provocative commentary already, including this one posted today at Business Insider.  We think the overlooked, confounding factor in analyzing Groupon's growth is its rapid international expansion.  A few additional thoughts:

--Groupon has probably scaled internationally faster than any business ever.  They deserve a ton of credit for that, particularly giving the Samwer brothers a big chunk of the company when they bought CityDeal and letting them lead the international growth.

--Since it has many characteristics of a retail business, Groupon's growth needs to be parsed by "same store" and "new store" growth.  Based on our (quick) reading of the S-1, there is some data here but not enough to do a thorough analysis.  The general breakout between North America and International glosses over the fact that each of those segments has massive amounts of "new store" growth opportunities.  The geographic case studies are helpful, but inconclusive.  That a relatively mature market like Chicago had 10%+ quarterly billings growth in Q3 is impressive.  Of course, big unknowns are the marketing costs behind that and the loyalty of younger cohorts of consumers (loyalty being necessary for them to be repeat, and therefore profitable, customers).  

--Our suspicion is that Groupon has been able to leverage its phenomenal buzz to move into new markets with remarkably low initial acquisition costs (both on the consumer side and merchant side).  So the overall company growth has been driven more by "new store" growth than "same store" growth.  That can't last forever.  As it has stepped on the growth pedal in every market, acquisition costs rise and we suspect that loyalty erodes with newer cohorts of consumers (and maybe even merchants).  Unfortunately, there isn't enough data provided to analyze this dynamic (there's a snippet of consumer cohort analysis in the roadshow, but it's clearly cherry-picked), and it's particularly muddled by the fact that different geographic markets could behave quite differently based on competitive and cultural dynamics.

--There are still fundamental concerns about Groupon's model, such as if most merchants actually make money running Groupons, if that actually matters to Groupon's business, and if Groupon will lose breakage because of legal reasons such as being considered a gift card.

--There is a huge growth opportunity in mobile, particularly if Groupon Now takes off and can hit critical mass with merchants.  Groupon's mobile business could end up being more valuable than its desktop business and look more like a marketplace business than an ecommerce business.  At a minimum, it will certainly have a much deeper competitive moat if it does hit scale.

Overall, we think there is enough data in the S-1 and roadshow to obviously disprove the idea that Groupon is some kind of ponzi scheme.  Clearly, it's an interesting growth business with a lot of unknowns.  The key question is, does it deserve to be valued like a great technology business (usually 5-10x revenue, sometimes more) or a great ecommerce business (usually 2-3x revenue, rarely more). 

If Groupon gets the 11b valuation implied by the pricing range, that's ~7x annualized revenue.  By comparison, Google is valued at ~5x annualized net revenue (net of cash), Salesforce.com at ~8x annualized revenue, and Amazon at ~2.5 annualized revenue.  Given the questions raised here and elsewhere, we think it's hard to defend Groupon at a 7x valuation.