Bearish Thoughts on Groupon (GRPN)

While I straddled the fence on Pandora Radio’s IPO, I’m clearly in the bear camp on Groupon (GRPN).

It is easy to be a little jaded on Groupon (GRPN) with all the hype and excitement surrounding it’s IPO, especially given the fact that it is just a coupon company. I like to ask if people were this excited when the Pennysaver, a coupon magazine, first came out?

A lot of bearish articles and blog posts have already been written on the Groupon IPO. The most bearish article I’ve come across is “Groupon is a Straight-Up Ponzi Scheme” by Jose over at the Knewton Blog.

But, optically, Groupon revenues look high — which they use to raise a financing round at a high valuation. Then they use the proceeds to hire vast armies of salespeople to dig deeper into Chicago’s local merchant community and repeat the trick in other cities.

Instead of re-hashing what a lot of other people have said, much better than I ever could, I’ll provides some links at the end of this post to their insightful pieces. However, I do want to comment on one thing, Groupon’s key metrics.

Key Metrics

Table is from Groupon’s S-1 filing.

On the surface the numbers look impressive. Groupon shows huge growth in subscribers, coupons groupons sold, and cumulative customers. It’s not as impressive when I normalize them to total subscribers.

Cumulative Customers/Subscribers:

• 2009 = 20.75%
• 2010 = 17.86%
• 3 months ending March 31 2010 = 25.45
• 3 months ending March 31 2011 = 19.02%

Groupon has been very good at getting people to subscribe to their service but real customers as a percentage of subscribers is slipping. This begs the question, how much is Groupon paying in advertising and subscriber acquisition costs? Does subscriber spending cover and exceed the subscriber acquisition costs?

Featured Merchants/Subscribers:

• 2009 = 0.15%
• 2010 = 0.13%
• 3 months ending March 31, 2010 = 0.08%
• 3 months ending March 31, 2011 = 0.07%

A slightly negative change but nothing too significant. However, as Groupon’s service matures and most merchants realize the true cost of discounting their goods and services I expect this ratio to decline further. Bret Arends breaks this down a little further in his article “Why Groupon’s IPO is no deal” for MarketWatch.

A typical Groupon voucher costs $20, but gets you a meal that would normally have cost you $40. That’s why you buy the voucher.

So in this case the restaurant is selling a $40 meal through Groupon and it gets just $11.60.

Yes, restaurants may agree to this for a while to try to get new customers. But they can hardly agree for long. If they could survive by giving their business away at nearly 75% off, they would be doing so already. If someone comes along offering them a better deal, they’ll jump.

Coupons Sold/Subscribers:

• 2009 = 69.09%
• 2010 = 59.89%
• 3 months ending March 31, 2010 = 51.25%
• 3 months ending March 31, 2011 = 33.81%

Yes, Groupon has impressive subscriber growth but again the question remains, are people finding value in their service and buying the coupons groupons? Or are people just signing up? According to Groupon’s key metrics it looks like more and more people are just signing up. Actual groupons sold per subscriber is declining rapidly. Either the bargains are not compelling enough or no one is interested in the discounted goods. This is not a good metric especially when subscriber growth slows down.

Further Reading

As mentioned above, I’ve provided some articles below that support my bearish view. Yes, it’s confirmation bias again.