A decade ago, the dot-bomb era was ending, and with it the destruction of billions of dollar of investor wealth.
Three years ago, the financial markets were collapsing after the popping of a housing bubble fueled by subprime lending and liar loans.
Today, Groupon raised $700m in an IPO in “the largest IPO for a U.S. Internet-related firm since Google Inc. raised $1.66 billion in August 2004.”
The stock rose 30% in first day trading over its offering price, although it dropped 13% since its opening price of $30. The total shares traded Friday were 142% of those issued — meaning on average every share was sold once and 40% of shares were sold twice. Presumably some of that comes from the “greenshoe” of the offering bankers flipping their shares in addition to their $50 million in fees.
Today, Groupon has a market cap of over $16 billion.
In its S-1, Groupon claims competition is not an issue:
If there's a question I've received from Groupon skeptics more than any other, it's, "how will you fend off the competition—especially massive companies like Google and Facebook?" I could give a dozen reasons to bet on Groupon, but it's impossible to predict the future or the actions of others. Well, now the sleeping giants have woken up—and the numbers are showing that what was proven true with literally thousands of other competitors is just as true with the incumbents of the Internet: it's kind of hard to build a Groupon. And since anyone with an Internet connection can track the performance of our competitors, I can be more specific:Normally, we’d wonder how much the shares will fall after the other 96% come out of lockup. However, insiders have already dumped $943 million in shares after capturing 84% of the VC proceeds. So perhaps the large insiders will be patient, holding out for a higher price in the long run.
- Google Offers is small and not growing. In the three markets where we compete, we are 450% of their size.
- Yelp is small and not growing. In the 15 markets where we compete, our daily deals are 500% of their size.
- Living Social's U.S. local business is about 1/3rd our size in revenue (and smaller in GP) and has shrunk relative to us in the last several months. This, in part, appears to be driving them toward short-sighted tactics to buy revenue, like buying gift certificates from national retailers at full price and then paying out of their own pocket to give the appearance of a 50% off deal. Our marketing team has tested this tactic enough to know that it's generally a bad idea, and not a profitable form of customer acquisition.
- Facebook sales are harder to track, but are even less significant at present.
Or maybe there is no long run. The company lost money for the last four quarters, and by some measures it was technically insolvency before the IPO. As Villanova business professor Anthony Catanach told CNBC:
The picture is even worse if you consider the significant intangible assets recorded by the company (goodwill, intangibles, deferred taxes, etc.). We still don’t have any reported evidence of the cash generating ability of these “assets”, so future write-downs may be forthcoming.Wikipedia tells us that 1637, a single tulip bulb sold for 10x average annual wages.
If you deduct these assets, to get a tangible equity number, the insolvency picture is even clearer.
We still worry about all the red flags that are being ignored. For example, with all the restatements (revenue, CSOI, etc.) and amendments, this delivers a powerful signal about the quality of internal controls over financial reporting, as well as the competence of the finance function at this company.
What else are we not seeing in the numbers? Recent senior management turnover does not help, and the rapid growth adds more concern to the internal control issue. And the working capital deficit (current liabilities greater than current assets) raises further concerns.
A century ago, philosopher George Santayana said: “Those who cannot remember the past are condemned to repeat it.” Nowadays, few philosophers make it to Wall Street, let alone invest in the market, which is why the “wisdom of crowds” is often the “madness of crowds.”