Commentary
Bubblicious: Groupon's Value Increases $10 Billion for No Reason
- by Erik Sass , Staff Writer @eriksass1, January 15, 2011
Okay, this settles it: we are in the midst of a social media bubble, and it is getting bigger at an alarming rate. Worse, it is about to ascend to the next stage of insanity -- and become a Bonafide Bubble -- as companies go public and everyone is invited to get rich quickly and effortlessly by doing the same thing as all the other people trying to get rich quickly and effortlessly.
What is all this doom and gloom based on? Since December the estimated value of Groupon, the social deal juggernaut with plans to go public in the not-too-distant future, has increased from just under $5 billion to "$15 billion or more," according to The New York Times.
In two weeks.
So, to review, that means the market's herd consensus on Groupon's value trebled -- to a figure 1.5X the gross domestic product of Brunei in 2009 ($10.6 billion) -- in less time than it takes to complete a tooth-whitening regimen.
There's no question Groupon is an innovative, successful company with a revolutionary new business model, and excellent prospects for expansion and revenue growth. But my question is: what changed between December -- when Groupon rejected a $6 billion buyout offer from Google, then announced a round of funding which raised $950 million and valued the company at $4.75 billion -- and today?
Well, a number of things didn't happen. Groupon didn't release financial results; as a privately-held company it doesn't have to. Execs said revenues exceeded $1 billion in 2010 -- but these statements included no details about the company's profitability. Meanwhile no new products or services were unveiled, no new strategic partnerships announced, no big names joined the board of directors. They did buy a handful of small group discount companies in Israel, India, and South Africa (SoSasta, Grouper and Twangoo) and hire a chief financial officer -- Jason Child, who previously served as the vice-president of finance for Amazon's international business -- which is always a good step. But aside from that, nothing much seems to have happened -- besides, of course, the much-reported $950 million love-fest.
True, earlier investments might be a basis for ponying up your own dough -- provided there are also some details about what the company plans to do with the money they've raised. And "we're going to get bigger" isn't enough: of course Groupon will find something to spend the money on, including overseas competitors, the question is whether these choices constitute an effective growth strategy.
Groupon execs may very well have an awesome, rock-solid plan for scaling the business up, which will require (among other things) reducing costs associated with its personnel-intensive local sales approach. But right now there are precious few details about the strategy, period -- good, bad, ugly, whatever. The press release announcing the latest funding, while entertaining ("Groupon Raises, Like, A Billion Dollars") is just as vague as comparable PR products from other companies, explaining that Groupon will use the money to "fuel global expansion, invest in technology, and provide liquidity for employees and early investors."
So basically... they're going to get bigger. Leading me to conclude that the only reason Groupon's value increased over 100% in less than two weeks is because it raised some money, and everyone says its value increased. The simple fact of other people investing in something is, to my mind at least, a pretty thin rationale for investing even more; in fact it is the definition of "herd mentality." Thankfully a public stock offering is coming soon, according to the NYT, and the stock market will have a chance to exert its strong rationalizing influence and mitigate the bubble dynamic.
To quote Homer Simpson: "In case you didn't notice, I was being sarcastic!"
Erik Sass is editor of Publishers Daily. You can reach Erik at eriksass@gmail.com.
This could be herd mentality, but it could also be driven by some very smart investors seeing a proven revenue model (rare enough in social media today) who took a hard look at the managment team, made sure their was a good financial person on board to keep things going in the right direction and bought in at what they believe to be the fair value of the company. I am not saying this because I have a vested interest in the company... I only wish I did.
I vividly remember the dot-com crash (was one of the many SF area people sent packing with stock worth nothing), and this social boom feels exactly the same. Tech culture is just like American pop culture (and our culture in general) --so driven for the next new/hot/big thing (as are investors) that our stock health is going to continue to feel like a roller coaster. While Groupon is a great concept, there are still huge numbers of people who aren't very socially connected, if at all, and with the younger generation's head count not coming anywhere near that of the older (less digital) generations, I think everyone needs to settle down and not expect so much churn from tech or business in general.
As I stated earlier, the current Groupon model is not sustainable for three reasons:
1. High personnel costs to build out the customer (advertiser) local model on a global scale. The only way this can work is to pursue an MLM approach for their sales force.
2. Advertising channels are morphing into new methods, particularily on mobile. Groupon relies on onboarding advertisers using 1980's technology. Any ad network could do the same with lower costs for CPC/CPT rev share. With the current 50% rev share, the churn or low repeat rates for advertising coupon offers will plateau their revenue model quickly, making an investment in them dicey at best.
3. valuing Groupon on the basis of eyeballs (registered users) is not the best way. If they can create an automated coupon system for any retailer, large or small, that's one thing. But that exists today as single offer - single coupon redeemer with well proven methods. Thinking that the group buying model makes more sense is a stretch, not proven.
Watch for LBS and mobile ads to lead the way, especially with 2D matrix barcodes (QR code) as a simple way to commit a transaction at the POS with mobile 3G phones. That is where Google, MSFT, Yahoo and others will move quickly.
I'm still unconvinced that these companies are sustainable for most important asset: mainly their paying customers. If I buy a yoga package, for instance for $20, the yoga business only takes home about 50%, while the other 50% goes to a single company in who-knows-where. The barrier to entry here for local Groupon competitors is some facebook marketing and a cell phone. I don't see how Groupon can own this space, particularly since they are also going to get shelled by Google on the "large competitor front" on top of all this. It will unfold dramatically though, I'm sure. Great article!
Yes, the business model is revolutionary. But no, there are few barriers to entry other than brand. And once price-based competition truly kicks in, Groupon's labor-intensive model will be an issue. There's a major difference from the high IPO valuation Google earned (and maintained): Google was and is a utility with inertia on its side. Groupon is likely to be the market share leader in a burgeoning category - but that doesn't justify the valuation.
Just remember the two key entities don't care about a bubble. Anyone who IPOs and then can sell and get out when the sucker public jumps in. That is the VCs and the Start Up people. The other is Wall Street who gets fees from the IPO and selling the shares to the sucker public.
Question is how many IPO at inflated prices then crash before the bubble pops. Many of these businesses like Facebook and Groupon are valid businesses at lower values and expectations. I would short these firms when they IPO. 9 out of 10 IPOs after the first year are worth less than the IPO price. Even a company like Priceline which went IPO at $14bil is now only worth $11bil.
Here is the deal. Groupon earned 200 million since day one. This is easy to find. Just divide the dollar they say they sold by the deals they did. It's on their main page. Now here is the real bubble stats... at 10 billion they are trading at 45 times earning. Pop
View from the street . . .
My company USA Savings Club deals with hundreds of local merchants that CANNOT afford the 75% hit of the DD companies.
With the copycats competing with Groupon and lack of repeat customer for the offers, the bubble will burst from the bottom.
No repeat customers - bargain hunters - 75% OFF - NOT Viable for most merchants!
We charge 5% and half goes to a local school, church or charity.
How many yoga classes and balloon rides can someone take?
Also did everyone forget Groupon's PR nightmare from this fall- was that just swept under the rug?
Reminder: http://www.entrepreneur.com/article/217705
Groupon can be a major liability for Small Business Owners.
Quote from the Entrepreneur article,
"A recent study by Rice University surveyed 150 small to midsize businesses that had used Groupon, asking about their social-coupon experience and whether they would use the service again. While 66 percent of the 150 respondents said that their Groupon deal was profitable, a significant 32 percent found it unprofitable. And 40 percent of the respondents said they would not use Groupon again -- notable, considering Groupon claims that at least 95 percent of its sellers request to be featured again."
That alone should make people question Groupon's valuable - they should have taken the money from Google.
Great Comic on Groupon's Short-comings: http://bit.ly/fAjIX8
Correct me if I'm wrong, but the way Groupon works is that you have to pay in advance for something you might never get around to going to the merchant to collect or use, right? Could it be that that's what makes the model profitable? Then the question is, will consumers get wise and stop taking spur-of-the-moment chances on things they don't want as much as they thought they did at the time? Or will they develop a permanent habit of putting money down on a vision of themselves experiencing new and exciting products and services?