The Groupon Discount

[Parsad]

Apparently, Groupon is worth billions of dollars and I personally enjoy their deals.  But, take a look at their financials and you'll realize only a fool would pay billions for them.  Thanks to Alan for sending me the filing.  Cheers!

 

http://sec.gov/Archives/edgar/data/1490281/000104746911008408/a2205238zs-1a.htm

[merkhet]

I love Groupon's deals too, but that Adjusted CSOI thing just strikes me as accounting voodoo.

 

"We'd be SOOO profitable, if you just ignore our largest costs..."

[beerbaron]

Only investment bankers can polish poop!

 

BeerBaron

[moore_capital54]

This isnt even the worst thing.

 

The worst thing and I can tell you this is absolutely the worst thing I have ever seen in my life when it comes to finance, much worst than derivatives, and much worst than HFT, is that these piece of shit startups will raise money from Institutions with LP's such as Calpers, Pension Funds and such, and then buy shares from the insiders.

 

This has got to be the most illegal thing in the world.

 

Groupon did it to the tune of $1b, Zynga did it to the tune of $500mm, Facebook is doing it, etc.

 

These guys have raised money privately to fund personal exits prior to even going public at artificial valuations based on the perception that they will be higher (trees grow to the sky) upon an initial public offering.

 

Eric Lefkovsky Sold nearly $500mm worth of Groupon shares this way, for cash proceeds. Mason sold over $30mm.

 

Marc Pinkus sold over $100mm

 

The list goes on.

 

Eduardo Saverin sold over $500mm of Facebook, as did Parker.

 

The buyers are not high net worth individuals, they are VC's backed by pensions, endowments, and insurance companies. High net worth individuals never serve as the dumb money.

 

 

[Parsad]

This isnt even the worst thing.

 

The worst thing and I can tell you this is absolutely the worst thing I have ever seen in my life when it comes to finance, much worst than derivatives, and much worst than HFT, is that these piece of shit startups will raise money from Institutions with LP's such as Calpers, Pension Funds and such, and then buy shares from the insiders.

 

This has got to be the most illegal thing in the world.

 

Groupon did it to the tune of $1b, Zynga did it to the tune of $500mm, Facebook is doing it, etc.

 

These guys have raised money privately to fund personal exits prior to even going public at artificial valuations based on the perception that they will be higher (trees grow to the sky) upon an initial public offering.

 

Eric Lefkovsky Sold nearly $500mm worth of Groupon shares this way, for cash proceeds. Mason sold over $30mm.

 

Marc Pinkus sold over $100mm

 

The list goes on.

 

Eduardo Saverin sold over $500mm of Facebook, as did Parker.

 

The buyers are not high net worth individuals, they are VC's backed by pensions, endowments, and insurance companies. High net worth individuals never serve as the dumb money.

 

Yup, read page 122 of the filing on.  Stinks!  Should be illegal.  Cheers!

[biaggio]

Moore_capital54, the small guy (pensioners, Calpers etc) rely on these VC's to do due diligence-I guess if these VC's make too many of these mistakes they end up losing the privledge to manage money. I think they are the equivalent of homerun hitters-they strike out a lot but make up for hit with a few homers.

 

I don't get it otherwise.

 

[moore_capital54]

It should be illegal because they second you engage in a capital raise for the purpose of redeeming shares you are making a market which requires you to be a 1934 Act company.

 

Biaggio, I disagree with your statement. The VC's are in the heads I win tails you lose business, they don't care and in some cases are repurchasing shares from their friends who got in at an earlier round.

 

The bottom line is this, when a company engages in a capital raise to repurchase shares, at that exact moment it should become publicly traded. Lets see if the market would support such valuations.

 

I have been in this game for way too long and especially being around the Canadian E&P and Junior Resource companies to smell what the real intentions are. Here is how it works, my friend. Insiders, Bankers and VC's know that before a company is public they can arbitrarily decide whatever valuation they see fit. Hell now people use Sharepost as a reference, some trades on Sharepost are for $50,000... You can begin to see how reliable this is. Anyhow they use these artificial valuations to exit, and they have turned it into an art.

 

The private placement, followed by an artificial round, followed by an artificial round pre ipo to take out the insiders (under the guise that this helps the company stay private longer and the employees focused on the business which is total bullshit) to which they pitch the investors that this is their last chance before ipo, followed by another ipo round. Then what happens? The stock is listed on an exchange where investors can actually engage in price discovery.

 

You know what happens next... the valuation will reflect the fundamentals. In Groupons case there is nothing to support even a $5b valuation let alone $30B.

 

I wouldn't pay more than $1b for Groupon and maybe make it a 0.5% position.

 

People don't understand that Google never had such shitty financials, when google went public you could already see the business model was profitable, what nobody predicted was the growth levels.

 

These guys just use the google growth curve to project profitability into the sky.

 

Look at LinkedIn for example, what in the hell are people thinking, or Yandex.

 

 

[Eric50]

The good news is that it's going to be a great short! lol

[Guest valueInv]

Moore_capital54, the small guy (pensioners, Calpers etc) rely on these VC's to do due diligence-I guess if these VC's make too many of these mistakes they end up losing the privledge to manage money. I think they are the equivalent of homerun hitters-they strike out a lot but make up for hit with a few homers.

 

I don't get it otherwise.

 

VCs are like surfers, they're looking for the next big wave, hoping to ride it and cash out before it comes crashing. They are very bad at due diligence partly because startups are so unpredictable. Silicon Valley works a lot by a "pump and dump" principle. A lot of startups can scale to a certain level quickly and then hit a ceiling. The insiders know where the ceiling is , the potential acquirers or  public markets don't because they don't have as deep an understanding of the new unproven market/technology. They look at the historic growth rates (revenues or customers) which can be made to look very impressive.They are finally left holding the bag but the VCs and insiders have made a lot of money. A few years later, the acquired product is shut down. Everyone rationalizes by saying "Integrating acquisitions is hard". The reality is insiders knew that the end of the road was coming and decided to cash out. Look at Google's acquisitions, you'll see a ton of killed products.

 

You would think VCs would lose their privilege to manage money but that doesn't happen. Calpers, etc are desperate for returns, they have pensions to fund. The public markets performed  badly in the last decade and the future looks cloudy. Where can they reach for higher returns to make up the funding gap?

[biaggio]

I am sure you guys are right. I just don t get how that should be sustainable.

 

[bookie71]

They have no moat, the local newspaper and a tv station now offer the same type of deal.  (KTUU and ADN). 

[Guest valueInv]

More signs of trouble in the daily deal market:

 

http://venturebeat.com/2011/10/20/buywithme-huge-layoffs/

[Liberty]

http://online.wsj.com/article/SB10001424052970204618704576644632834963512.html

[DCG]

So, the market is currently valuing Groupon at around $20 Billion with their IPO today. That's more than companies like Waste Management and Kellogg, about 8 Billion more than Whole Foods, over twice the size of companies like Safeway, ConAgra, Bed Bath & Beyond & Clorox, and just $5B less than FedEx and Yum Brands.

 

....right

[Ballinvarosig Investors]

        Beyond their obvious goodness, these numbers are important because they answer one of the main criticisms thrown at us in the past few months, relating to a metric we put in the S-1 called ACSOI (adjusted consolidated segment operating income) to help people understand how we think about marketing expenses. The reason everyone in the world seems to hate ACSOI is that it makes us look magically profitable by subtracting a bunch of our customer acquisition marketing costs from our expenses. The reason we didn't realize everyone in the world would hate ACSOI (no, it's not the same reason we didn't realize everyone in the world would hate our Superbowl ad), is that we think it actually does a pretty good job at describing our marketing expenses in a steady state—we just didn't realize there would be so many skeptics. I think it's worth going deep on this one more time—brace yourself.

 

        Our internal forecast shows two different types of marketing: what I'll call "normal marketing"—which is NOT excluded from ACSOI—and "customer acquisition marketing," which is. The way Groupon spends on marketing is unique in three ways:

 

        1.    We are currently spending more than just about any company ever on marketing—in Q2, we spent nearly 20% of our net revenue on marketing, while a typical company spends less than 5%. Why do we spend so much? The simple answer is "because it works." But that's only part of what makes our situation special.

 

        2.    Our marketing—at least the customer acquisition marketing that we remove from ACSOI—is designed to add people to our own long-term marketing channel—our daily email list. Once we have a customer's email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald's, or most other companies. If I'm a Johnson, and I'm trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you've bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid. There is no cost of reacquisition—that's unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.

 

        3.    Eventually, we'll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses (the piece that we remove in ACSOI) to nominal levels. We are spending a ton now because we're acquiring as many subscribers as we can as quickly as we can. We aren't paying attention to marketing budget (just marketing ROI) in the way a normal company would, because we know that even if we wanted to continue to spend at these levels, we would eventually run out of new subscribers to acquire. So our customer acquisition spend drops severely to reflect the fact that eventually we'll run out of people we can add to our email list. We view this internally as a very large one-time expense and then our job forever after will be to continually convert these subscribers into customers and to make sure our customers keep buying from us. Ongoing, the normal marketing dollars we spend are not something we would remove from our internal calculation of ACSOI.

 

        I tried my best to explain this simply, but it's not lost on me that if you actually understood this, you probably had to read it three times. It's not easy stuff. It's much easier to assume that we're goons. So people can be forgiven for being suspicious. In fact, feel a little bad about how downhearted the critics will be when we don't turn out to be a Ponzi scheme—those are good impulses for journalists to have, and I hope our non-evil ways don't destroy their spirits.

 

        Anyway, there's a reason that I just went on about ACSOI. One of the questions that skeptics ask is, "when you ramp down marketing, won't revenues stop growing as well? Aren't you just buying growth?" Over the past several months we've been consistently reducing our marketing spend and yet revenues are still increasing at a significant pace. In Q1 of this year, marketing represented 32.3% of our net revenues. By the end of Q2 it had fallen to 19.4%. And it has continued to fall over the past several months all because we've been investing in our own long-term marketing channel—our email list.

More on ACSOI.

[maxprogram]

The bottom line is this, when a company engages in a capital raise to repurchase shares, at that exact moment it should become publicly traded. Lets see if the market would support such valuations.

 

I have been in this game for way too long and especially being around the Canadian E&P and Junior Resource companies to smell what the real intentions are. Here is how it works, my friend. Insiders, Bankers and VC's know that before a company is public they can arbitrarily decide whatever valuation they see fit. Hell now people use Sharepost as a reference, some trades on Sharepost are for $50,000... You can begin to see how reliable this is. Anyhow they use these artificial valuations to exit, and they have turned it into an art.

 

Not really sure what the difference is. Shares of a company are worth what buyers are willing to pay. Private markets, public markets, auctions, whatever. It's all the same. Of course, that says nothing of what the true intrinsic value is (I'm not saying GRPN and LNKD aren't overvalued--they probably are) but as any value investor knows intrinsic value and market value aren't correlated in the short run, regardless of where transactions are being done.

 

Just don't understand why using "Sharepost as a reference" is any different than a stock trading on the NASDAQ. It's a market of buyers and sellers. If insiders/owners want to keep it outside the exchanges at first, then that's their choice. Since LNKD and GRPN have gone public, their prices are much higher than most of the "private" market transactions so the implication that pre-IPO prices were pumped up anymore than they would be once public doesn't hold much water.

 

Agree that many VC firms these days are too myopic (old VC investors like Georges Doriot and Arthur Rock are good counter-examples). But providing VC money is very competitive now and I think firms who have a winner on their hands NOW are much more inclined to take the profit than wait to see if expectations pan out. But that of course is nothing new and has been going on for 100s of years.

[Guest valueInv]

        Beyond their obvious goodness, these numbers are important because they answer one of the main criticisms thrown at us in the past few months, relating to a metric we put in the S-1 called ACSOI (adjusted consolidated segment operating income) to help people understand how we think about marketing expenses. The reason everyone in the world seems to hate ACSOI is that it makes us look magically profitable by subtracting a bunch of our customer acquisition marketing costs from our expenses. The reason we didn't realize everyone in the world would hate ACSOI (no, it's not the same reason we didn't realize everyone in the world would hate our Superbowl ad), is that we think it actually does a pretty good job at describing our marketing expenses in a steady state—we just didn't realize there would be so many skeptics. I think it's worth going deep on this one more time—brace yourself.

 

        Our internal forecast shows two different types of marketing: what I'll call "normal marketing"—which is NOT excluded from ACSOI—and "customer acquisition marketing," which is. The way Groupon spends on marketing is unique in three ways:

 

        1.    We are currently spending more than just about any company ever on marketing—in Q2, we spent nearly 20% of our net revenue on marketing, while a typical company spends less than 5%. Why do we spend so much? The simple answer is "because it works." But that's only part of what makes our situation special.

 

        2.    Our marketing—at least the customer acquisition marketing that we remove from ACSOI—is designed to add people to our own long-term marketing channel—our daily email list. Once we have a customer's email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald's, or most other companies. If I'm a Johnson, and I'm trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you've bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid. There is no cost of reacquisition—that's unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.

 

        3.    Eventually, we'll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses (the piece that we remove in ACSOI) to nominal levels. We are spending a ton now because we're acquiring as many subscribers as we can as quickly as we can. We aren't paying attention to marketing budget (just marketing ROI) in the way a normal company would, because we know that even if we wanted to continue to spend at these levels, we would eventually run out of new subscribers to acquire. So our customer acquisition spend drops severely to reflect the fact that eventually we'll run out of people we can add to our email list. We view this internally as a very large one-time expense and then our job forever after will be to continually convert these subscribers into customers and to make sure our customers keep buying from us. Ongoing, the normal marketing dollars we spend are not something we would remove from our internal calculation of ACSOI.

 

        I tried my best to explain this simply, but it's not lost on me that if you actually understood this, you probably had to read it three times. It's not easy stuff. It's much easier to assume that we're goons. So people can be forgiven for being suspicious. In fact, feel a little bad about how downhearted the critics will be when we don't turn out to be a Ponzi scheme—those are good impulses for journalists to have, and I hope our non-evil ways don't destroy their spirits.

 

        Anyway, there's a reason that I just went on about ACSOI. One of the questions that skeptics ask is, "when you ramp down marketing, won't revenues stop growing as well? Aren't you just buying growth?" Over the past several months we've been consistently reducing our marketing spend and yet revenues are still increasing at a significant pace. In Q1 of this year, marketing represented 32.3% of our net revenues. By the end of Q2 it had fallen to 19.4%. And it has continued to fall over the past several months all because we've been investing in our own long-term marketing channel—our email list.

More on ACSOI.

Complete BS!!!

 

[Mark Jr.]

 

   

 

        Our internal forecast shows two different types of marketing: what I'll call "normal marketing"—which is NOT excluded from ACSOI—and "customer acquisition marketing," which is. The way Groupon spends on marketing is unique in three ways:

 

        1.    We are currently spending more than just about any company ever on marketing—in Q2, we spent nearly 20% of our net revenue on marketing, while a typical company spends less than 5%. Why do we spend so much? The simple answer is "because it works." But that's only part of what makes our situation special.

 

When it comes to internet businesses (my day job is running one) I look at this exactly the opposite. I think the amount spent on marketing is an inverse indicator of your moat. And spending a lot on marketing doesn't make your situation special, because all your competition has to do is also spend a lot and then presto, everybody's special.

 

        2.    Our marketing—at least the customer acquisition marketing that we remove from ACSOI—is designed to add people to our own long-term marketing channel—our daily email list. Once we have a customer's email, we can continually market to them at no additional cost. Compare this to Johnson and Johnson, McDonald's, or most other companies. If I'm a Johnson, and I'm trying to sell you a box of Band Aids, I have to keep spending money on commercials and magazine ads and stuff to remind you about how sweet Band Aids are, even after you've bought your first box. With Groupon, we just spend money one time to get you on our email list, and then every day we email you a reminder of the sweetness of our metaphorical Band Aid. There is no cost of reacquisition—that's unusual (and we created ACSOI to point that out). If Johnson wanted to follow the Groupon strategy, he would have to start a free daily newspaper about bandages and then run Band Aid ads in it every day.

 

I think they are overestimating the staying power of their subscribers. They think that once somebody is in their list, they will stick around, keep reading the emails and convert at some measurable rate. A daily mailing list is a pure saturation level mail blast. Especially if the content is all marketing. They have nowhere to go from there (unless they want to start emailing their subscribers hourly?)

 

They are measuring their repeat customers cumulatively but they are only subtracting their unsubscribes from their gross subscriber counts. I think they think that once somebody buys from them more than once, they are a "repeat customer" and will be in perpetuity. I'd have to read through the S-1 in detail, but it's also the sense I get from this bit of quoted material.

 

        3.    Eventually, we'll ramp down marketing just as fast as we ramped it up, reducing the customer acquisition part of our marketing expenses (the piece that we remove in ACSOI) to nominal levels. We are spending a ton now because we're acquiring as many subscribers as we can as quickly as we can. We aren't paying attention to marketing budget (just marketing ROI) in the way a normal company would, because we know that even if we wanted to continue to spend at these levels, we would eventually run out of new subscribers to acquire. So our customer acquisition spend drops severely to reflect the fact that eventually we'll run out of people we can add to our email list. We view this internally as a very large one-time expense and then our job forever after will be to continually convert these subscribers into customers and to make sure our customers keep buying from us. Ongoing, the normal marketing dollars we spend are not something we would remove from our internal calculation of ACSOI.

     

I don't think this will pan out the way they anticipate. They seem to be saying "we'll outspend everybody to get all the subscribers available onto our list, then when we have them and they're buying repeatedly, we can stop spending on marketing and our profits will go up (or materialize)"

 

But what will likely happen is that even the repeat buyers will have a lifespan: they too will eventually fall off, probably stop reading their emails. There will be competitors also marketing to them, they may be getting multiple offers from multiple companies (it's not like the bargain hunters are going to cultivate a brand loyalty to groupon, they just want deals).

 

In other words, I think list fatigue will set in hard and heavy and they never will be able to radically decrease their marketing spend and "coast" on the list. In fact even by their own admission, they're growing so fast, what will likely happen is that they'll find they cannot lower marketing and their acquisition costs will even increase, as the universe of potential subscribers depletes.

 

Groupon has always reminded me of the traffic arbitrage and click arbitrage plays I've commented on before - the model isn't sustainable and in the case of the arb players, they tend to go *poof* in a very abrupt manner.