Groupon has a great tagline as "the fastest growing company in history,"' but don't underestimate how incredibly risky an investment it still is.
David Heinemeier Hansson recently published an interesting article outlining what a hot mess Groupon really is. He starts off by sharing some pretty troubling numbers:
- It's costing Groupon $1.43 to make $1
- Groupon is losing $117M per quarter despite their revenues of $644M
- The billion dollars they recently took from investors was all used to cash out early investors
- They are left with $208M cash on hand, this is roughly how much they spent on marketing in first quarter of this year
- Groupon has 7000+ employees trying to make profit with $3B in revenue a year
It's a bit alarming that a company which earns three billion dollars in revenue a year is having trouble figuring out how to turn profit. It's even more troubling to see such a company file for IPO. After all, how can Morgan Stanley, Credit Suisse, and Goldman Sachs agree to put their names behind this? How could potential investors invest in such a risky company? It turns out Groupon's management has borrowed some of Salesforce's accounting magic called "Adjusted Consolidated Segment Operating Income" or "Adjusted CSOI" where they do not consider online marketing expenses:
The adjusted CSOI measure is the one I find a little disturbing. This measure backs out "online marketing expense, acquisition-related costs and stock-based compensation expense."' Not counting online marketing expense seems, uh, ridiculous. The company writes that "online marketing expense primarily represents the cost to acquire new subscribers and is dictated by the amount of growth we wish to pursue."
Uh, ok, but look what happens if you don't count it. In Q1, the company had a loss from operations of $117.15 million; that reflects $179.9 million in marketing expenses; back that out and, voila!, massively positive adjusted CSOI. Likewise, for all of 2010, a loss from operations of $420.3 million includes online marketing expenses of $241.5 million, and acquisition expenses of $203.3 million, plus stock-based compensation expenses of $36.2 million. Back all that out, and, tada!, positive adjusted CSOI.
To sum it up: Tech IPOs are one hot mess. It seems the folks that will make a bunch of money will be the banks and Groupon, the folks that will lose money will be the pension funds and the "regular schmucks now eyeing another chance to get in on the ground floor of another bubble".