June 9, 2011, 12:55 PM

How much for that Groupon?

A Forrester analyst takes a closer look at Groupon and its prospects for growth.

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When daily deal powerhouse Groupon filed paperwork for an initial public offering a week ago, it had to reveal financial details that it previously kept private. In reviewing the numbers, Forrester Research e-business analyst Sucharita Mulpuru says there’s “no rational math” that justifies Groupon’s stated plan to raise $750 million with the IPO.

“Yes, Groupon grew from $30 million in sales to more than $700 million between 2009 and 2010, but most of that growth was artificial,” she writes in a blog post she calls an open letter to anyone planning to buy into Groupon’s IPO. She says Groupon’s current high expenses eat up its sales and that much of last year’s sales growth isn’t from sustainable sources.  

For example, more than a third of 2010 sales, $265 million, came from acquisitions in international markets, and Groupon introduced services in more than 100 smaller U.S. markets, which contributed to 2010 sales but will dwindle in supply as Groupon runs out of new markets. The company also spent more than $263 million on marketing last year, which Mulpuru equates to Groupon spending $31 for every customer it acquired, and those customers didn’t spend much more than that $31 buying Groupon’s vouchers, she says. “That means it spent about $250 million to make another $300 million.” By comparison, she notes that the average large online retailer spends $11 million each year on interactive marketing. Mulpuru doesn’t say how many customers Groupon gained last year, but Groupon says in its IPO’s S-1 filing with the Securities and Exchange Commission that it had 83.1 million subscribers as of March 31, up from 3.4 million as of March 31, 2010.

She estimates that $615 million of Groupon’s stated $713 million in 2010 sales came from non-sustainable sources, which leaves less than $100 million in organic growth. “That’s not shabby given that its 2009 revenue was $30 million. But then that would mean its growth would only have been 233% and not 2,200%,” she says.

“The market opportunity isn’t as big as the industry players would like you to believe,” she says. That’s partly because Groupon’s business relies on discounting products, which makes it a hard sell for merchants to buy into—and that costs money. “This IPO game isn’t about finding value, it’s about finding a greater fool who actually believes the valuation is true,” she says. “Trust me, you will be the fool.”

Mulpuru says investors would be wiser to wait and invest in other companies that have greater profitability.

Groupon, which is in a government-mandated quiet period as it goes through the IPO process, did not immediately respond to a request for comment. In its S-1 filing, however, it lists several risks that could affect its growth, stating: “We have experienced rapid growth over a short period in a new market we have created and we do not know whether this market will continue to develop or whether it can be maintained.”


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