Groupon IPO Hinges on Revenue

NEW YORK ( TheStreet) - Much has been written about whether Groupon is selling damaged goods in its initial public offering or whether its shares will end up being the deal site's best bargain yet.

For many investors, the key to answering that question will be Groupon's massive revenue generating prowess and how the company will manage cash to achieve shareholder returns.

After a dig through of consumer services companies going into an IPO with strong revenue reliant on specialty or internet sales over the last fifteen years, we've come to the conclusion that investors need to ask whether it's the next GameStop ( GME) and DSW ( DSW), or if it will flounder like Orbitz ( OWW) and others.

After Groupon goes public, its end-of-year earnings are likely to show that the company sold over $1.5 billion worth of deals coupons, even if it may lose over $400 million doing so. Few online focused consumer services companies have done IPO's with such a developed business and their fates have varied greatly.

After going public, DSW and GameStop shares have surged, Dex Media and Petco were taken private at significant premiums to their IPO prices and Orbitz, 1-800-Flowers.com ( FLWS) and BarnesandNoble.com fell flat.

Comparisons between Groupon, Orbitz, Dex Media, Gamestop, DSW, BarnesandNoble.com, Petco and 1-800-flowers.com are strong because they went into their IPO's with hundreds of millions, even billions in revenue. In contrast, Amazon ( AMZN) had $16 million in annual revenue during its 1997 IPO; Google ( GOOG) had $19.3 million in sales - making them incomparable IPOs.

Because of revenue in 2011 already in excess of $1 billion, Groupon is now seeking a less than 10 times 2011 sales valuation in its IPO, significantly lower than its previous 36 times 2010 revenue valuation in June and those used to value LinkedIn ( LNKD), Pandora ( P) in their offerings.

Chicago -based Groupon is expected to sell 30 million shares -- 4.7% of its existing 632 million share base -- for $18 per share, with rumors of demand making a price increase possible. The IPO would raise $540 million through the offering and afterward, the company will trade under the ticker GRPN. It also values the company at $11.4 billion, less than half of its initial $25 billion valuation demand in a June filing.

When DSW filed for an IPO for $19 a share in 2005 , the Columbus, Ohio -based designer shoe seller had $961 million in annual revenue and recorded a profit of $34 million by year end. Similarly, Petco had nearly $1.3 billion in revenue and a loss of $22.8 million in the year it went public. GameStop, meanwhile, had $1.1 billion in revenue and it eked out a $7 million profit in the year of its filing.

DSW stock has nearly doubled since going public, GameStop has surged 157% since its 2002 filing even after falling more than 50% from a Dec 2007 peak of $62.30 a share. Petco was taken private by Leonard Green & Partners and Texas Pacific Group in 2006 at an over 50% premium to its $19 a share filing in 2002. Dex Media, the local print and internet search company with $1.6 billion in sales and a $50 million loss, was bought by R.H. Donnelley in 2005 at a premium to its IPO. Those high selling specialty and internet retailers may bring hope to Groupon -- even if other IPO sales haven't fared so well.

Orbitz, the online travel agent, went public in 2007 with $859 million in revenue and a loss of $85 million in 2007 - selling shares for $15 each. After struggling with losses and increasing competition from Priceline.com ( PCLN) and Kayak.com, the company's shares have fallen over 85% to $2.43.

Similarly, after a $19 a share IPO in 1999, barnesandnoble.com was bought by its parent in 2003 for a big loss to buyers of the offering in spite of doubling revenue to $424 million and narrowing its losses to $11 million. 1-800-Flowers.com has suffered an equally poor life as a public company since doing a 1999 IPO for $21 a share. Back then the company earned nearly $300 million in sales and lost $6.8 million - by 2011, the company earned $689 million and swung a $5.7 million profit, its first since the recession. Nevertheless, shares are down over 80% to just $2.74.

The question prospective IPO buyers might want to ask is whether Groupon will suffer from a crowded and overspecialized market? It may also be that Groupon's present revenue base will turn it to an industry leader like DSW, which earned $107 million in profit this year, its best as a public company. Additionally, looking at Petco and Dex Media, it might not be too early to ask if Groupon may become a takeover target sometime down the road.

At issue is the pace of the rate of growth in Groupons sold and its revenue per subscriber. According to company filigns, from the second quarter 2009 through the fourth quarter of 2010, the company more than doubled its Groupons sold every quarter. In the final quarter of 2010, it sold more than 16 million Groupons. Since the end of 2010, it's taken 9 months to double its Groupons sold to current levels of 33 million. The company also made $15.9 per each email subscriber when it only had a smattering of 152,203 subscribers in June 2009. With its exponentially larger 142 million subscribers, the company now only earns $3.3 on each.

Still, in the more than two years of data that the company's now reported, there are positive signs. On average, Groupon is now selling 4.2 Groupons to repeat customers up from 3.3 sold to customers in June 2009. Additionally, its revenue per Groupon sold has increased to $13, its highest reported level ever and an increase in profitability of 25% from June 2009.

The question is whether Groupon's sales growth puts it in a position to be profitable once expenses to grow the reach of its business.

In the first nine months of the year, Groupon increased its marketing expense six-fold to $613 compared with the same period in 2010. Additionally, its revenue for each email subscriber fell to $3.3, a 15% drop. The company now also has more than 10,000 employees after a push to grow in the U.S. and internationally.

A mix of history, fundamental analysis and qualitative judgment are going to be the keys for buyers and sellers of Groupon stock after it prices its IPO.

-- Written by Antoine Gara in New York

More from Technology

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Some Companies Are Already Feeling the Effect of GDPR

Some Companies Are Already Feeling the Effect of GDPR

Experts Break Down GDPR Risks for Investors

Experts Break Down GDPR Risks for Investors

Netflix Ready to Surpass Disney as America's Most Valuable Media Company

Netflix Ready to Surpass Disney as America's Most Valuable Media Company