Is the Groupon model sustainable? (Part I)
Groupon has set the collective buying scene on fire over the last few months. After rebuffing Google’s $6bn buy out bid (read post here), Groupon’s IPO valuation of $25bn ignited speculations of a bubble (given that with revenues of $760 million, the P/E multiple is 33!)
However, the rational of Groupon’s high valuation and the business fundamentals are now being questioned?
An overstretched valuation: the making of a bubble!
To quote Forrester research e-commerce analyst Sucharita Mulpuru: 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.
The argument goes such that the IPO valuation of $25 bln with 2010 revenues of $760million places the stock at a P/E of 33! That is high enough. However, $615 million of the $760 million were the result of acquisitions and expansion into new markets. Excluding that, Groupon generated $96 million in 2010 revenue from truly organic growth. So while the topline says 233% growth, a lot of it is in inorganic form which may not be sustainable unless there are very strong business fundamentals in place to support the high revenue and traffic opportunity. At a self generated $96 million revenue, Groupon’s IPO valuation of $25 bn is a P/E of 260. Even if the exuberance were to be tapered down to $2bn valuation, the P/E multiple would be 26 which by itself is also very high.
Everything that is social or crowd is basking in the glory of the success of Facebook, LinkedIn and a few other social business models. However, a lot of this exuberance is irrational. Everything social is not gold and investors would have to be wary about the ability of many of these companies to be able to stand upto their high valuations. Groupon, is the forbearer of collective buying, a very potent concept.(read more about Collective buying).But irrational exuberance may bust the expectation bubble before it gets anywhere.