Groupon is a lot things: ambitious, audacious. Tomorrow, it will be a public company, too.
But investors should be very wary about assuming Groupon is the next Amazon. Despite the many times the analogy has been drawn, including by Groupon’s management and investment bankers, nothing could be further from the truth.
A Bloomberg article published Tuesday night highlighted just a few of the glaring disparities between present-day Groupon and Amazon circa May 1997, when it went public. As this article notes, back then, Amazon had 256 employees; today, Groupon has more than 10,000. Amazon lost $5.79 million the year before its IPO; Groupon has lost $527.7 million over the last four quarters. Assuming Groupon goes out at its offering price of $16-18 per share, it will immediately trade at a price/sales ratio of 4.6 times; Amazon traded at 1.9 times its revenue for an entire year following its IPO.
More significantly, Amazon “already had an e-commerce platform at the time of its IPO,” says Paul Bard, director of research at Renaissance Capital in Greenwich, Conn.. “It wasn’t like, ‘We’re going to build this platform and people [will come].’”
Not so Groupon. “Groupon is trying to evolve from a core, daily deals business into a sticky platform that provides real-time, location-based local commerce – to become a place for self-serve merchants to make their marketing more efficient,” notes Bard. “But a lot of that platform isn’t proven yet; it’s the vision of management, and we have no evidence that they’ll deliver on that vision.”
The dissimilarities don’t end there, despite the “amazing parallels” between Groupon and Amazon that Groupon itself claimed during its road show. Amazon’s valuation was $468 million when it went public, leaving it plenty of room to grow into its current valuation of roughly $100 billion. By contrast, Groupon’s valuation tomorrow is expected to be $11-12 billion, leaving its investors little upside potential.
Groupon’s offering is being valued at 11 times its estimated 2013 earnings before interest, tax, depreciation, and amortization (EBITDA) of just under $1 billion. Assuming it will reach breakeven in the fourth quarter, that’s an incredibly aggressive estimate. Know how long it took Google to go from being profitable to enjoying $1 billion in EBITDA? Four years. It took eBay six years. Amazon? Five-and-a-half years. “To Groupon’s credit, the growth cycle of Internet companies has been wildly shortened because of scalability and so forth, but no other Internet company that I know of has ever [pulled off what Groupon is suggesting],” says Bard.
“The level of riskiness means you have to be really comfortable about overpaying,” says Ryan Jacob, founder and CIO of Jacob Asset Management in New York. Jacob says he isn’t. “The pricing is too high for us. It’s definitely one where we’d rather see how things play out over the next few quarters.”
“They’ll get very good demand, because of how the investment banks have structured this thing, with Groupon only floating 4.7 percent of its outstanding shares,” says Scott Sweet, senior managing partner at IPO boutique, an advisory firm. “But the demand is very short-term. No one trusts this company’s longevity.”
Groupon may have “aligned themselves with Amazon,” says Sweet, “but they may as well say Google or Apple. It’s a circus, a cartoon.”