Last week, Groupon (NASDAQ:GRPN) released its first quarterly report since coming public in early November. Unfortunately, it was a huge disappointment. While revenues surged 194% to $506.5 million, the company still showed a net loss of $42.7 million, and GRPN shares plunged nearly 14% on the news.
The move, while big, wasn’t shocking — Groupon has been quite volatile since its IPO, sporting a price range between $14.85 to $31.14.
So does this mean Groupon is too risky an investment, or should you give it a go? Let’s take a look at GRPN’s pros and cons:
Pros
Mega-Brand: It’s hard to believe, but Groupon only got its start in November 2008. The company has done nothing but grow at warp speed, and in the process, Groupon has become a global brand. The company now boasts about 33 million active customers and diverse operations spanning 47 countries. In fact, about 63% of GRPN’s revenues come from outside the U.S.
Acquisitions: Groupon has been aggressive on this front during the past couple years, including recent deals for Hyperpublic and Kima Labs. Acquisitions have been key in moving into new countries, as well as adding new technologies. Groupon’s IPO was important, allowing Groupon to use its stock to leverage its dealmaking.
Technology: Groupon certainly has a sophisticated technology infrastructure, which allows for targeted deals that are based on preferences and customer behavior. And the company plans to continue hiking spending on technology, with the hopes of achieving the same kind of engineering levels found among top Silicon Valley companies.
Cons
Losses: Will Groupon ever become profitable? That’s the big question every investor has to be wondering. Despite all its growth, GRPN does not seem to be getting any economies of scale. Then again, Groupon has to spend substantial amounts on sales and customer support personnel. Keep in mind that the overall headcount is over 10,000.
Unlike Facebook or LinkedIn (NYSE:LNKD), Groupon does not have a viral model, which means the company must spend large amounts on marketing. In the latest quarter, the costs came to $156.5 million.
Something else to consider: Groupon has been expanding into new categories like travel services, which tend to have lower profit margins.
The CEO: Groupon’s Andrew Mason is only 31, and this is the only company he’s ever helmed. He also has a reputation for being quirky. For example, he once posted a video of himself on YouTube while doing yoga in his underwear in front of a Christmas tree. Stunts like this might be cool for the CEO of a startup, but it’s something that could make the head of a public company difficult to take seriously.
Competition: Groupon must contend with hundreds of rivals, including LivingSocial. However, the most troublesome are the giant Internet operators like Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN), which want to be major players in the daily deals business — and have the resources to make it happen.
Verdict
Since its inception, Groupon has lost a total of $676.6 million. That’s a staggering number — even compared to the dot-coms of the 1990s, such as Webvan. Yet the company still trades at a hefty valuation of 9.5 times revenues.
To achieve profitability, Groupon plans to significantly reduce its marketing spend. But will this make it tougher to get more users — or maintain existing ones? If so, there’s no doubt that the company’s rivals will capitalize.
So in light of the lack of profitibility in the business model and the intense competition, Groupon’s cons outweigh its pros.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook, All About Short Selling and All About Commodities. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
