All You Ever Wanted to Know About Groupon

BOSTON (TheStreet) -- Groupon's highly anticipated initial public offering goes live Thursday after buzz and hype turned to criticism and hating of the "group coupon" company. That hasn't been helpful. Given that it's a fast-growth company, Groupon could deliver outsized returns for investors willing to take some chances.

So here's a breakdown of Groupon, by the numbers.

30 million: Amount of shares Groupon is selling to the public.

632.4 million: The amount of Groupon's outstanding shares.

4.7%: The share of Groupon that will be owned by the public. It's the lowest for any company with an offering greater than $200 million in a decade. (See chart below.)

$16-$18: Groupon's anticipated offering price at IPO.

$480 million: Groupon's expected proceeds in the offering (after subtracting underwriting costs and commissions).

$10.7 billion: The value of Groupon, assuming a midpoint of the expected offering price.

8.2: Price-to-sales ratio based on the past 12 months of revenue. In comparison, Amazon, which has part-ownership in competitor LivingSocial, trades at only 2.25 times trailing 12-month revenue. (See chart below.)

29.5 million: The amount of people who have purchased a Groupon as of the end of the third quarter, an increase of 226% from the beginning of this year.

142.8 million: Groupon's subscribers, those who have opted in to Groupon's mailing list, up 182% since the end of 2010.

20.7%: Percentage of Groupon subscribers who have actually purchased a Groupon.

62.5%: Groupon's international revenue (as a percentage of overall revenue) in the third quarter.

44.2%, 42.3%, 37.2 %: Groupon's Deal Share (or amount retained from all deals) in the past three quarters. Groupon claims the drop is due to lower margins from new deal channels, such as Groupon Live, Groupon Getaways and Groupon Goods. Unfortunately, Groupon doesn't break down the margins for the new segments. (See chart below.)

$4.40, $3.90, $3.30: Average revenue per subscriber over the past three months. (See chart below.) This could be evidence that, given the continued increase in the subscriber base, there is "deal fatigue" among subscribers. How many deals do you receive in your inbox each and every day?

111%, 72%, 33%, 10%: Groupon's sequential revenue growth over the past three quarters. See a pattern here?

95%, 75%, 46%, 28%: Groupon's sequential customer growth over the past four quarters. See a pattern here?

137%, 64%, 39%, 24% Groupon's sequential subscriber growth over the past four quarters. You get the picture.

$215 million, $207 million, $190 million: Groupon's marketing expenditures over the past three quarters. (See chart below.)

A drop in marketing spending has given way to lower growth in subscribers, customers and revenue. Can Groupon maintain lofty growth rates without spending so frivolously on customer acquisitions? I doubt it.

Just take a look at what CEO Andrew Mason told employees in a rant a few months back: "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.

"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."

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Given the drop in margins for Groupon and the decreasing rate of revenue per subscriber (deal fatigue?), Groupon could have its work cut out in achieving profitability. Sure, once the marketing expenses tail off, expenses will retract, leading to the higher probability of turning a profit. But the question remains: Is Groupon just a flash in the pan, or a real business that can grow organically without the haphazard marketing expenses that have propped up the company's key statistics?

That's the end of the numbers. Here's the commentary:

If you haven't heard, Groupon is being called by some as the biggest sham to ever hit the IPO market. Some have even said Groupon is "technically insolvent," or that the underlying business is built on "complex financial instruments."

Let me be clear, I'm not a Groupon supporter, yet I think the media has been too quick to bash the company. In an article from June, I even spoke of how I felt the Groupon business model was flawed, citing the negative effects that a deal can have on a small business.

But, let's get one thing straight: Groupon can be a great option for some businesses. There are no upfront costs, and in almost all instances, there is an implicit guarantee that Groupon will deliver a significant amount of people to your door. Ever run an ad in the local newspaper? Something time-sensitive, maybe? Of course, there's the upfront charge, leading to a virtual guessing game as to how many sales will be made.

With Groupon, a merchant gets targeted local advertising that produces almost guaranteed results. As the No. 1 deal provider, Groupon has so much leverage with its user base that businesses are literally knocking down the doors to get a deal listed. According to Groupon, there's a nine-month waiting list for companies that want to be featured on the site.

Many forget about incremental margins when thinking of Groupon and merchants. Most are focused on the fact that on an average $50 coupon (sold for $25), a business owner only collects roughly $12.50 per deal sold. Doesn't seem like a lot, especially if you run a business that has low margins to begin with.

But let's think about a typical restaurant. In most circumstances, labor costs will remain fixed no matter how many people you're serving. If your restaurant is consistently running below 100% utilization, the fact is that this sort of promotion can be worthwhile.

Bringing in customers who may never have visited your business can be invaluable. An empty restaurant is a morgue. But one that's bustling with laughter can be a good thing, especially for a restaurant. I myself will never walk into a restaurant that's empty. But if its crowded, I want to wait. Food must be good, right? Sure, it's a loss leader, but so is any form of advertising, and sometimes, as with newspaper ads, the results don't pay off.

Of course, there are the Groupon horror stories (I spoke of Posies cafe in my last story), and there will continue to be. The business owners that don't crunch the numbers or put a limit on the number of deals sold will end up suffering. A recent MIT study noted that a company's Yelp rating declined significantly after conducting promotions with Groupon. (See chart below.)

In sum, Groupon probably will survive. By spending extreme amounts of money in building a huge subscriber base, the company has established itself as the leader in the deals market. While the market has some obvious challenges, it is also evolving. There will always be deals on food, travel and services, yet the format in which the deals reach a customer will likely change.

As I mentioned in my last article, I like the steps the company is taking to leverage its user base, such as with Getaways (Groupon's Travel partnership with Expedia), Groupon Now and, now, Groupon Goods. We've even heard Andrew Mason refer to Groupon Now (which lets consumers search for deals within a certain proximity to a specific location) as the future of Groupon, and I'm guessing he's right.

But as of the last tally, Groupon Now has been off to a slow start, with only $1 million of gross billings (according to data provider Yipit) in September, despite being available in 25 markets. Getaways, on the other hand, has been successful, with $10 million in gross billings during its first calendar month, as has Groupon Goods, which did $2 million in sales during its first week. The negative part is that Expedia is now questioning the value of working with Groupon. On its recent quarterly call, CEO Dara Khosrowshahi said that, despite early success, management is trying to determine if Groupon customers are coming back to use Expedia for other travel needs.

The bottom line is that the sentiment regarding Groupon is as negative as I have ever seen for any IPO. I've displayed the statistics and graphs for Groupon, which show that the trends are slowing drastically. Despite this, there is a real and (in my opinion) sustainable business here. I, like others, believe that "deal fatigue" is a major concern. But, as Groupon continues to evolve, the company will likely find its niche, albeit at a much slower growth rate.

So, the big question is whether to buy at the IPO. While I have become more optimistic regarding the company's prospects in the past few months, I still can't get comfortable with any valuation close to $10 billion. And the odds are that the stock closes a lot higher Thursday, given the low supply and likely huge retail interest.

If Groupon Now evolves and becomes the primary driver of revenue for the company, and management can figure out how to scale and become profitable without relying on huge marketing expenses, Groupon could be a great investment. The problem is that these are big "if's," and you would be paying dearly to gain a piece of this probability for success.

The stock might be a great trade for a trader, but for long-term investors, stay on the sidelines and wait this one out.

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser. Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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