Even by the tumultuous standards of internet IPOs, there has been nothing before to compare with this.
Groupon’s path to Wall Street is due to reach its conclusion with the formal pricing of shares in the “daily deals” site late on Thursday, putting an exclamation point on one of the fastest rises in business history. Three years after it made its first sale, this is a company that is generating nearly four times as much revenue as Google was at the same stage. It already has as many employees (10,418) as Google had in year eight.
Not that this makes it any easier to put a value on the stock, or project whether chief executive Andrew Mason is destined to join the pantheon of dotcom heroes or end up on the scrap heap (albeit considerably richer than when he started.)
Put aside, for a minute, all the red flags – the accounting restatements, the dual-class stock, the early cashing-out by founders to the tune of nearly $1bn. Even its massive working capital deficit (Groupon owes far more to merchants than it has cash on hand) is nothing to lose sleep over if you assume its revenues are relatively stable – in fact, it is actually a virtue for a company to be able to fund itself this way.
The main problem comes with assessing where Groupon’s business is heading next. It’s like tracing the trajectory of a rocket and trying to guess whether its engines are already burning out – and if so, whether it has hit the escape velocity needed to reach a permanent and profitable orbit.
That those awesome engines might be sputtering was strongly suggested by its latest results. Groupon displayed two features that would normally stop IPO investors in their tracks: a sharp deceleration in its growth rate, and a slump in its profit margins.
Many internet companies face pressures such as these at some point in their lives as core businesses run out of headroom and they are forced to diversify into new – and often less profitable – markets.
But with Groupon, there are distinct signs that these things are occurring much sooner. Its astronomical growth rate, still running at 72 per cent a quarter in the opening months of this year, slumped to below 10 per cent in the third quarter. At the same time, the amount of money it retains from the average coupon (the equivalent of its gross margin) collapsed by 5 percentage points, to 37 per cent.
There are two ways to read this. One is that competition and an end to the novelty value of online coupons among merchants and consumers are already starting to take their toll. The other interpretation is more sanguine. This holds that, battered by criticism of its losses, Groupon is trying to prove that it can turn off the marketing afterburners and cruise into profit any time it wants. In the third quarter, with its spending on subscriber acquisitions falling 27 per cent from three months before, it essentially broke even.
The 143m email addresses in its database of “subscribers”, only a fifth of whom have ever bought a coupon, give it plenty of people to market to without needing to ramp up marketing costs (though if Groupon is signalling that the hyper-growth days are over, it will put a hefty dent in the growth multiple Wall Street might have been willing to accord the company.) Also, according to the optimistic view, the margin erosion is nowhere near as bad as it seems. Groupon puts it down to a push into new markets – such as travel and consumer goods – and promises its margins will recover quickly.
Yet there are plenty of warning lights around Groupon that are flashing amber. Comparisons with Google at the time of its IPO are instructive: the search company’s business fundamentals were rock solid, and it went on to produce several years of growth that far exceeded even the optimistic forecasts.
Groupon, by contrast, is approaching its IPO at a time when the number of merchants issuing “Groupons” and the number of coupons being bought are barely rising at all. Whatever multiple Wall Street might otherwise put on Groupon’s free cash flow and revenue growth rate, this uncertainty calls for a big discount. It will take some quarters to determine what is happening to the underlying business, and whether Mr Mason can manage the transition from stellar but unprofitable growth to a more steady-state business.
At the same time, the company is racing to move beyond coupons to become a broader online “platform” for local merchants. The daily deals business will run out of steam, whether now or in the future, so this makes sense. But turning a start-up whose raging success has been tied to a single product into a broader “solutions” business for merchants will be like changing the tyres on a racing car in mid-race. If he can pull it off, Mr Mason will certainly have earned his place among the handful of lasting dotcom winners.
Richard Waters is the Financial Times’s West Coast Managing Editor