Groupon Would-Be Investors Say Amazon Parallels Don’t Fly: Tech

Groupon Would-Be Investors Say Amazon Parallels Don’t Fly
Groupon is seeking to raise as much as $540 million selling 30 million shares for $16 to $18 apiece, according to regulatory filings. Photographer: Tim Boyle/Bloomberg

Groupon Inc.’s argument that it’s like e-commerce leader Inc. is meeting with skepticism among investors.

Amazon was better suited at the time of its 1997 initial public offering to withstand competition than Groupon is on the eve of its sale, slated for tomorrow, said Peter Sorrentino, a senior money manager at Huntington Asset Advisors in Cincinnati, which oversees $14.5 billion. Groupon is also generating lower revenue per employee and spending more of its sales on marketing than Amazon was, making the comparison far-fetched, he said.

“In terms of its progress toward a profitable enterprise, I think that’s a huge stretch,” Sorrentino said of the comparison between the two companies. For Groupon, “the beast is growing faster than its revenue stream, and you may be chasing profitability for a while.”

The Chicago-based company is highlighting similarities to Amazon, the world’s largest online retailer, in meetings with investors in New York and San Francisco, as it seeks to stir interest before its IPO. Groupon is seeking to raise as much as $540 million selling 30 million shares for $16 to $18 apiece, according to regulatory filings.

“The parallels between Amazon and Groupon are amazing,” Jeff Holden, Groupon’s Senior Vice President of Product Management, said in a webcast of the roadshow, touting his nine years of experience at Amazon.

Mike Buckley, a spokesman for Groupon, declined to comment.

Back to 1997

Groupon aims to go public with slower growth, greater losses and a less productive workforce than Amazon had before its initial offering in 1997, data compiled by Bloomberg show. It’s also seeking a higher valuation compared with sales.

Amazon’s 256 employees generated an average of $62,520 in the quarter before its initial public offering, while Groupon’s 10,418-strong workforce produced an average $41,290 each last quarter. Amazon’s sales leaped about 18-fold in the quarter before its IPO, outpacing Groupon’s fivefold gain. Amazon’s loss of $5.78 million the year before its IPO amounted to 37 percent of revenue, while Groupon had losses of $527.7 million in the most recent four quarters -- equal to 41 percent of sales.

Even so, Groupon would trade at 4.6 times sales in its first year of business after the IPO, based on the midpoint of its per-share price range and revenue projections from Fred Moran, an analyst at Benchmark Co. That would surpass Amazon’s multiple of about 1.9 times revenue in the year after it went public.

“Like Groupon, Amazon was very much criticized for not making any money, and there were questions about whether it would ever make any money,” said Kerry Rice, an analyst at Needham & Co. in New York. “That’s where the similarities end.”

Market Conditions

The IPO by Groupon is likely to be oversubscribed, a person familiar with the matter said. Still, the company is considering current market conditions as it decides whether to alter plans on how much to raise and at what price, this person said. Global shares slumped yesterday amid concern that Europe’s debt crisis will slow growth.

Groupon is spending more to sign up merchant partners than Amazon did at its start. Groupon’s marketing expenses reached $613.2 million in the first nine months of this year on revenue of $1.12 billion, compared with Amazon’s $6.1 million the year before its IPO on revenue of $15.7 million.

“Jeff Holden and their CFO are both from Amazon, and they’re playing that up,” said Greg Sterling, an analyst at Opus Research Inc. in San Francisco, who watched the webcast. “They want you to think, ‘Obviously, Amazon is very successful. Here are smart people who wouldn’t be here if there wasn’t a similar opportunity.’”

Merchant Partners

While both companies must market themselves to merchant partners and depend on consumers to buy the products offered by those businesses, Amazon also stores its merchants’ products in its own fulfillment centers and ships them to consumers. That can put greater pressure on Amazon’s margins.

A business model based on marketing, by contrast, has the potential to be higher-margin than Amazon’s, Needham’s Rice said. Groupon can scale back marketing after gaining ground, while Amazon will always need to ship products and build out warehouses to match growth, he said. Amazon said fourth-quarter operating results may range from a loss of $200 million to a profit of $250 million as it builds fulfillment centers and develops new products.

Still, Groupon must differentiate itself at a time when hundreds of other competitors have entered the market, said Peter Jankovskis, who helps manage $2.4 billion at OakBrook Investments LLC in Lisle, Illinois. Existing retailers were ill-prepared to vie with Amazon’s Web storefront, while Groupon’s approach to daily coupons is easy to replicate.

“Amazon was trying to encroach on large, well-established businesses,” he said. “By the time the larger retailers recognized the threat, it was too late. Amazon was established. It’s going to be tougher for Groupon, because there are a whole lot of other companies out there already trying to do the same thing.”

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