Groupon IPO: Could the company really be worth $30 billion?

Commentary about business and finance.
Aug. 11 2011 6:17 PM

A Steal at $30 Billion!

Are Groupon's creative performance metrics masking problems with its business?

Shop keeper putting open sign in window. Click image to expand.
Is Groupon's valuation too good to be true?

Since the daily deals site Groupon launched in November 2008, its story has been about huge numbers, giant savings, and astronomical growth. According to one accounting, it is the fastest-growing company, ever. According to its own accounting, it has become profitable far sooner than most tech startups. Wall Street seems poised to reward it with an initial public offering valuing the company at as much as $30 billion. But are all these big numbers based on questionable metrics? And can Groupon really keep up the soar-away growth justifying that fantastic valuation?

Those are the questions investors have been pondering since Groupon started the process of going public. In June, the Chicago-based company filed an S1 with the Securities and Exchange Commission, allowing prospective investors to take a look under the young business's hood and to kick its tires before deciding whether to buy shares. (The company expects to make its initial public offering sometime in the fall.)

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The document shows truly fantastic growth. In fewer than three years, Groupon has picked up 7,100 employees, gained more than 83 million subscribers, and reached quarterly sales of more than 28 million coupons. Its turnover hit $713 million in 2010. And the company has grown so quickly and found a local-advertising niche so rich that it has already become profitable, it says. It reported operating income of $61 million in 2010 and $82 million in the first quarter of 2011. For context, the world's biggest advertising company, Omnicom, made profits of about $200 million that quarter—with a 120-year corporate history and a staff of 68,000.

But in a note at the beginning of the filing, Groupon's CEO, Andrew Mason, indicated that the company does not "measure [itself] in conventional ways." The document included metrics that do not conform to GAAP, or generally accepted accounting principles. Most notably, the company touted its "ACSOI" or "adjusted consolidated segment operating income"—a yardstick nobody had ever heard of. The "key" metric tallies operating income "before our new subscriber acquisition costs and certain non-cash charges," Groupon said, thus showing "profitability before marketing costs incurred for long-term growth."

ACSOI, mentioned nearly 50 times in the document, showed that Groupon made $82 million in the first quarter of the year. But ACSOI left out the hundreds of millions of dollars associated with marketing the service, acquiring other businesses, and bringing in new subscribers. So it left out very real costs of growth—not one-off investments or unusual charges, but expenditures core to the company's expanding business.

Investors noticed—and howled. The Wall Street Journal termed the filing "magic." Tech blogs declared the company a sham. Many commentators hearkened back to the worst days of the late-1990s tech bubble, when out-of-nowhere dot-coms with cloudy revenue streams got billions from IPO-hungry investors. Forbes pointed to one especially salient piece of commentary from 1998. "Certain internet CFOs are pushing investors to look at EBITDAM," Silicon Valley investor Bill Gurley wrote. "The 'M' represents marketing, and is an attempt to get Wall Street to ignore what has become the single biggest expenditure for internet startups. This only makes sense if you truly believe that marketing costs will one day go away, which should be considered unlikely. Perhaps we should make it easier and skip straight to EBE (earnings before expenses)."

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