We scoffed at a $6 Billion Groupon. Now $25 Billion?

Anthony Miyazaki. Groupon

We scoffed at a $6 Billion Groupon. Now $25 Billion?

Back in November of last year, social coupon firm Groupon made big news when it was reported that it turned down a $6 billion offer from Google.  There were many in the business world (including here at sensiblefolk) who thought that Groupon management should have taken the cash and ran.  This wasn’t to say that Groupon wasn’t a good company with an admirable business plan.  It was, and it still is: offer coupons to people under the condition that a certain number of people have to buy in before the deal is valid.  This inspires people to use their online social networks to promote the deal so they can get the deal.  The main criticism seemed to be that growth could be limited by both the number of deals the firm could offer and, perhaps more importantly, the ability of the Groupon business model to be imitated by small players in local markets, which is where Groupon ultimately sells its services.

Well, now there’s a new development.  Bloomberg is reporting that Groupon is in talks with banks about an IPO of potentially $25 billion, over four times Google’s $6 billion price!  Not a bad increase in valuation in a short four months.

But is Groupon really worth $25 billion?

First of all, as with all valuations (from lunch at your favorite restaurant, to that high-end sports car you’ve been eyeing, to purchasing stock in “the next big tech firm”), perception will play a key role in the outcome.  If enough people think that Groupon is worth $25 billion, then it will be if they spend their money accordingly.  The real question, then, is to consider (as objectively as possible) what the future of Groupon holds with respect to (1) growth and (2) revenue sustainability.

Why Groupon Will Grow

As mentioned back in November’s blog, Groupon has plenty of room to grow if it starts to microsegment its markets, offering particular Groupons to various market segments in each of the geographic areas that it serves.  Without this segmentation, it will soon saturate the marketplace and then be up against the growing number of competitors fighting for market share in a stagnant industry.

Groupon also can grow because it continues to have the capitalization to buy out formidable competitors faster than they can establish themselves.  (In fact, if you’d like to start a smart business, copy Groupon’s business model for your geographic location, undercutting their pricing by taking a smaller per unit profit, and then let Groupon buy you out when you start to grow.)

Why Groupon Won’t Grow as Fast as They Might Think

One concern put forth in November was the ease with which small competitors could enter the market with a similar business model.  Basically, small competitors only need to:

  1. Find local retailers willing to offer steep discounts in exchange for volume (who might like to use Groupon, but have been put on a 3-month Groupon waiting list).
  2. Offer to do what Groupon does, but at half of the profit.
  3. Use slick online social marketing skills to build up takers for the offer.
  4. Make the retailer happy, collect the cash, and start the process over.

Then there are those big players who are expressing an interest in the social coupon industry.  These are big players like Google, Facebook, and Amazon (with Living Social), who, once fully committed to competing in the industry, will likely dominate it with their current reach and resources.  (See a related Bloomberg video interview with social media analyst Lou Kerner.)

Bloomberg News contributor Paul Kedrosky (see his Infectious Greed blog here) points out in a recent interview another serious concern regarding growth.  True tech companies that are able to rely on automation and technology to grow can at some point reach an inflection point wherein sales revenue and profits start to take off and we see substantial growth.  However, Kedrosky notes that Groupon is quite labor intensive when it comes to making the deals on which the revenue model is based, thus, automation and technology are not as fundamental to how its growth occurs (with the clear exception of their use of online social media).

So, whether you’re worried about small local players, huge internet behemoths, or the labor intensive nature of the Groupon-retailer dealmaking process, you’re likely to harbor doubts about writing your portion of the $25 billion check.  Then again, if the firm were to offer a 90% off Groupon deal on its own stock, maybe you’d become a Groupon Groupie after all.

What do you think?  Will social media marketing continue to push Groupon into the big, or should I say HUGE, bucks?  Or will social media facilitate the information transparency that will allow smaller firms to compete, making Groupon soon to be Groupoff?

An objective valuation of a market opportunity is sensible.

Be sensible.
                                                               Anthony Miyazaki

Leave a Reply