Groupon Aims to Rebuild Confidence After Post-IPO Slump
Groupon Inc. (GRPN), the largest daily coupon website, has work to do if it’s to rebuild investor confidence after one of the worst public market debuts for a Web company since the dot-com crash.
The Chicago-based company has dropped 51 percent since its initial public offering in November and is now valued at just above the $6 billion offer it rejected from Google Inc. 17 months ago.
Investors will look for signs of optimism later today from a first-quarter earnings report that analysts predict will show an 80 percent jump in sales to $530.8 million and improving profitability. Groupon, which created the daily-deal market less than four years ago, has been troubled by mounting losses, accounting errors and regulatory missteps, leading investors to look past international sales growth and new products.
“There is a lot of negativity priced in and not much hope,” said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida, who has a “buy” rating on the stock. “Over time I think investors will become more convinced that Groupon does have a sustainable competitive advantage via its distinct global scale.”
Groupon lost 48 percent of its value in its first six months as a public company, a period that ended on May 3. Since 2001, only Odimo Inc., ValueRich Inc., Orbitz Worldwide Inc. and FriendFinder Networks Inc. performed worse among newly public U.S. Internet companies. Groupon’s shares rose 11 percent to $11.04 at 10:05 a.m. in New York.
After regular trading today, Groupon will report results for the second time since its IPO. Operating profit, or earnings left after operating costs, is expected to be $32.7 million, compared with a $117.1 million loss a year earlier. The net loss is projected to narrow to $28.9 million, or 4 cents a share, from $102.7 million, or 48 cents, a year ago.
Groupon originally reported operating income in the fourth-quarter of $15 million, only to have that reversed into an operating loss of the same amount after restating results because of higher refunds to merchants. At the time of the restatement in March, Groupon said it discovered a “material weakness” in its financial controls.
The company had already run into problems with the U.S. Securities Exchange Commission. Prior to the IPO, Groupon asked investors to disregard statements made by Chairman Eric Lefkofsky during the pre-IPO quiet period and was forced to abandon a controversial accounting method.
‘Through the Mud’
“The SEC ran them through the mud on their accounting practices, revenue recognition and the model,” said Lou Pizzileo, a partner in the technology practice at accounting and consulting firm J.H. Cohn LLP in New York. “All that happened in public purview. That certainly doesn’t help post-IPO stock performance.”
Among the 10 U.S. consumer Internet companies to go public in the past year, Groupon has fared the worst, followed by Pandora Media Inc. (P)’s 42 percent slump. Half of the companies have gained, with LinkedIn Corp. and Zillow Inc. more than doubling in value.
Most of Groupon’s stock loss has come since its March 30 restatement. While it’s been punished for those hiccups, Groupon can point to some improvements. Free cash flow almost tripled in the fourth quarter from the previous year to $155 million. Meanwhile, marketing costs as a percentage of revenue fell to 32 percent in the fourth quarter from 40 percent the prior period, so Groupon is spending less to attract users.
“The company’s profitability is going to increase pretty dramatically,” said Jeffrey Houston, an analyst at Barrington Research Associates in Chicago, who recommends buying the shares.
Houston’s $30 price target on Groupon shares makes him the most bullish among 15 analysts tracked by Bloomberg. The average is $20.37, which is more than twice the current price. Of the 22 analysts with recommendations, seven say “buy,” 10 rate the stock “hold” while five say “sell.”
Groupon has also diversified its business. The company generated 63 percent of its revenue outside the U.S. in the fourth quarter. Almost 30 percent of transactions in North America were completed on mobile phones in April, up from 25 percent four months ago, Chief Executive Officer Andrew Mason said in a letter to shareholders last week. Its technology to personalize deals is also improving, he wrote.
The venture capitalists that backed Groupon are among those with the most riding on Mason and his team. New Enterprise Associates has seen the value of its 14 percent stake plunge to $863.1 million from $1.7 billion at the time of the IPO. Accel Partners’ 5.2 percent ownership has fallen to $328.7 million from $664 million.
Groupon’s story is resonating across Silicon Valley. Even with rapid growth and a popular brand, the business model and management team have to be ready for public market scrutiny, said Mike Volpi, a partner at Index Ventures in San Francisco.
“The core lesson, which a lot of companies have already taken to heart, is make sure your business is well-baked before you take the company public,” Volpi said. “This is a good lesson for us venture capitalists as well.”
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