I use coupon websites all the time. I love a good deal. However, I’ve always been skeptical of coupon stocks that go public — what reason could they have, other than for their founders to cash out big time?
Each has a slightly different business model, but they all depend on relationships with retailers and brands; coupon websites earn commissions when consumers use their coupons. So, when I go to one of these websites and grab a coupon code, then use that code to purchase an item online or in-person, the coupon site gets a commission.
Commission rates depend on factors such as how much exposure consumers have in the marketplace, the volume and quality of the sales, and the categories of products sold. Obviously, retailers must be willing to discount their merchandise in the first place.
So, are any coupon stocks worth investing in?
RetailMeNot Inc (NASDAQ:SALE) has the sad distinction of being my primary source for online coupons. There is no doubt that SALE revenue has been growing at a rapid pace for quite some time, but that has never really translated into bottom-line growth that has been impressive for a coupon stock.
In FY2012, SALE reported $16.9 million in revenue, which yielded $2.8 million in operational income and $2.3 million in net income. Revenue and income figures increased through 2013, but in 2014 — when this coupon stock went public — the income numbers fell, even though revenue increased from $209.8 million to $264.7 million. Operational income fell from $52.7 million to $49.4 million, and net income fell from $31.5 million to $27 million.
Apparently, investors are expected to pay 36x earnings, and value a coupon stock making $27 million at almost $1 billion?
RetailMeNot? I think not.
Coupons.com Inc (NYSE:COUP) takes a different approach. COUP focuses on packaged goods. It’s actually a smaller enterprise, in that it only works with 700 companies across 2,000 brands, but it has 30,000 publishers to display its coupon offerings.
The revenue play for this coupon stock is a bit different. Every time a customer activates a coupon, either by printing it or saving it to a retailer loyalty account, COUP gets paid a fee regardless of whether the coupon is actually redeemed or not. Similarly, the company also gets paid if a code gets used for an online purchase.
Alas, the financials are even worse for COUP than for SALE. Revenue doubled to $221 million from FY2012 to FY2014, but the company had a $20 million operating loss in 2014, and a $23 million net loss. COUP was also burning cash until last year, when it eeked out $11.4 million in operating cash flow.
Interestingly, COUP has the same market cap as SALE — $1 billion. No sale for me on this coupon stock.
Finally, there’s the infamous Groupon Inc (NASDAQ:GRPN). I’ve been bearish on the company for a long time because financials stink and there is so much competition. The company has a new CEO who is, apparently, leading a “turnaround,” but for a company as young as GRPN there should be no need for a turnaround.
Groupon’s business isn’t terrible, but it isn’t great, either. GRPN actually had operating income of $98 million and $76 million in FY2012 and FY2013, respectively, but went negative last year to the tune of $15 million.
What’s encouraging is that operational cash flow has consistently been in the $200 million-$300 million range, with FCF of $150 million-$200 million. Further, the company has $1 billion in cash and no debt.
But again, the market wants me to value GRPN — a coupon stock that is losing money — at $5 billion? No way.
So, I say use the coupons — but stay away from coupon stocks.
As of this writing, Lawrence Meyers has no position in any of the aforementioned securities.
