Groupon Worth $25 Billion?
As Groupon marches toward a possible IPO this year, it will need to convince skeptics that it can survive onslaughts from rivals, including Facebook, eager to get into the online coupon business.
Groupon Chief Executive Andrew Mason told Reuters in January it was talking to bankers about an initial public offering, and Bloomberg said on Thursday the discussions could value the company at up to $25 billion.
But a source familiar with the matter told Reuters the site, which offers daily discounted deals at local restaurants and retail outlets, was unlikely to command such a lofty valuation so shortly after it turned down a $6 billion buyout offer from Google Inc (GOOG.O: Quote, Profile, Research) in December.
"There's no way that there could have been a $19 billion difference in value at the time anyway," the source said. "Have the prospects of the business changed enough in 2-1/2 months to suggest that a $19 billion value gap now is actually understandable? I don't think so."
Groupon's inflated valuation comes as desperate investors have bid up the value of hot Web start-ups in secondary markets for pre-IPO shares, making them tough buyout targets.
Groupon declined to comment on the report.
A decision has not yet been made on an IPO, the source said, reaffirming remarks by Groupon Chief Executive Andrew Mason to Reuters in late January. The multi-billion dollar valuation is the latest in a string of high valuations for hot Internet companies including Facebook and Twitter, and raises questions about how these companies, albeit fast-growing, could ever justify the sky-high valuations.
Groupon said it has been profitable since June 2009, but does not disclose financial information. It is said to have generated $760 million in 2010 revenue, according to the Wall Street Journal.
Groupon, which ended 2009 with 1.8 million subscribers, signed up 50 million by the start of 2011 and now has 70 million users in 500 markets in 45 countries.
"The interest is going to fade in what Groupon offers," said Jeffrey Grau, a principal analyst with research firm eMarketer. "It reminds me of when eBay launched online auctions. It was the rage and then people's interest began to cool."
Groupon offers its members discounts of 50 percent to 70 percent on local services, provided that enough members sign up for any single offer. It takes a commission of 30 percent to 50 percent from the merchants who provide the services. The concept of online local discounts has spawned rivals including LivingSocial and larger companies planning new features such as Facebook seeking to capitalize on people looking for a good deal.
"They are basically one-trick ponies," Grau said. The challenge, analysts say, is to convince retailers that offering discounts will translate into repeat customers.
"The Groupon crowd are deal seekers," said Nguyen Tran, co-owner of Starry Kitchen restaurant in downtown Los Angeles. "They tend to be real cheapos." Tran said shoppers who come in to redeem a Groupon deal rarely turn into regulars who come back and pay full price. Keeping fickle consumers and merchants happy is an issue, suggested Forrester Research analyst Sucharita Mulpuru. He said that Groupon is having trouble retaining businesses.
"They have more employees than I think Facebook has, they're making less money, they're in markets as 3rd tier as Sioux City and Greensborough and they haven't got many merchants to do more than 1 Groupon per year," she said.
Groupon has over 5,900 employees, including 1,400 in North America and about 4,500 in other regions.
"They have salespeople who are hounding every small and large business in America but even then, they're having a hard time renewing and getting other merchants to agree to do Groupons," Mulpuru added.
In January, Groupon met with major Wall Street banks to discuss a potential offering. Goldman Sachs and Morgan Stanley are likely to lead the offering and both are vying to take a commanding role.
Groupon, which recently raised $950 million from investors including Andreessen Horowitz, Battery Ventures, Greylock Partners and Kleiner Perkins Caufield & Byers, is contemplating the size of an offering and whether they want or need to go public at this point.
Larger offerings have generally performed better this year, the source said.