A question on everyone’s lips at the moment is whether the $billion valuations that a number of the top private internet companies are attracting are here to stay. My answer is that all of them look toppy, but some could turn out to be justified by strong revenue and earnings growth over the next couple of years. When pushed as to which is the strongest and which the flakiest I plump for Facebook as the strongest (now at $85bn) and Groupon as the flakiest of the group.
Before I go further I want to say that Groupon is a fantastic business. The company has an amazing track of awesome execution, has 70m users, and has broken records for the speed of its growth in both revenues and valuation. Plus it is reported to be very profitable and the smart guys at Google were prepared to buy the company for a lot of money. My comments below may seem critical but they are made only in the context of ultra high valuations. For sure Groupon is worth a lot of money – just maybe not the $5bn paid in Feb on Second Market or the rumoured $25bn at IPO.
The bear case on Groupon has two elements:
- People are churning off Groupon email lists at a high rate and whilst they are doing a great job of adding new subscribers at a faster rate that can only go on for so long before they hit the limits of the online population. People get tired of having the offers in their email every day.
- The service brings lots of customers to Groupon’s small business clients, but not much value – although not many of them have worked that out yet. The discounts and Groupon margin mean the customers aren’t profitable on their first visit and not enough of them turn into regular customers to make it all worthwhile.
Against this backdrop I was interested to see the following Groupon revenue chart on Techcrunch this morning:
These are US revenues only, which is presumably Groupon’s most mature market, and thus the market most likely to be feeling the pinch if the bear case outlined above has merit, and February showed a big fall from March. One data point doesn’t make a trend (you need two for that :D), but given the potential fragility in Groupon’s business model and their IPO aspirations it will certainly have set some alarm bells ringing.