Gustavo Ballvé on June 21st, 2011
Corporate Strategy, Food for thought, Investment Themes, Media, Mental models, Portfolio Management, Signal or Noise, Tech

Groupon’s IPO filing has given it a “financial high profile” that it’s probably regretting. So many people have been poring over its numbers and criticizing the business model quite vocally that it may even cool off some of the excitement. Why should we care? Because once you ignore the IPO-hype noise, the underlying criticism is, for once, based on analysis of the business model via its reported numbers. Imperfect as the discussion still is, since it only takes into account the past performance of one player (albeit the largest) and the current business models in the group-buying arena, it’s worth reading the linkfest inside. In fact, here’s an interesting exercise: playing the role of advocate/ investment banker for Groupon. It’s “easier” to build a pessimist opinion, so the exercise is building a “counter-intuitive” case in favor of a high-priced IPO. What growth drivers (current and unforeseen) does Groupon need to successfully tap into to justify a US$ 20, 25 billion valuation?

First of all, with this June 3rd post we’ve discussed early impressions of Groupon’s IPO filing and had some early doubts. In it there’s also a link to our Dec. 2010 linkfest on Groupon, mandatory reading for those interested in the subject (or so we like to think).

“Valuation God” Aswath Damodaran has quipped technically about the Groupon “innovative” accounting debate. Level-headed and fair, it’s nonetheless damaging.

Less level-headed is the Fortune blog post Mr. Damodaran alludes to. Still fair, however…

Magic trumps math at web start-ups – The Dealbook’s take on the subject, extensive to other IPOs such as Pandora (let’s not get started on the “socialmedia/app bubble” discussion).

Study offers grim news on deal sites – Fortune – We’ve talked about these studies before and it’s far from a sure-fire way of analyzing the business model, but it’s definitely a building block. In case you miss the PDF link, here it is again.

Groupon gets a pre-IPO smackdown – AllThingsD – Not necessarily business model-related but a dimension that is vital to us: people. In this case, co-founder Eric Lefkofsky.

Fuzzy accounting enriches Groupon – NYT.com – In the first part of this story the author applies Groupon’s “ACSOI” metric to Netflix and even Johnson & Johnson. Amazing results.

Groupon is at a loss to justify itself – FT.com – John Gapper hits at the same issues in the Financial Times.

Forrester analyst questions Groupon’s valuation – Reuters – Ouch: “There is no rational math that could possibly get anyone to the valuation Groupon thinks it deserves,” (…) “This IPO game isn’t about finding value, it’s about finding a greater fool who actually believes the valuation is true. Trust me, you will be the fool.” — here’s his open letter to potential GRPN investors. Just remember that at least part of the motivation for loudly blasting an “easy” target is publicity. Sometimes it’s 100%. We have no idea how big a role it played here. In his defense, he has been pretty consistent about it. She isn’t negative at all about the business of daily deals, so it’s a particular gripe with valuation, which also sounds reasonable.

Coupons.com raises $200 million – NYT – Coupons.com isn’t focused on daily deals, but it has coupons in its DNA. LivingSocial, Groupon’s largest competitor, is also very well capitalized. To consider Groupon in its current form a “winner takes all” beneficiary seems absurd when there’s so much water to run under the bridge.

Groupon’s fate hinges on words – NYT – This in-depth article is a must-read on Groupon’s differentiated content strategy – whether it’s right or it really represents a source of “edge” is still to be seen. It’s also tough to decide whether it’s evidence of little to no operating leverage (other than at the G&A level).

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