For those that don’t pay attention to the wide world of IPOs, you may be surprised to discover that deal-of-the-day (DOTD) giant Groupon recently became a publicly traded company (as of November 2011). With 33 million customers and expansion into other countries well underway, this really isn’t an unexpected turn of events. But despite the company’s expected trajectory for sustained growth in the coming quarters of 2012, their newly released stock suffered an alarming plunge (a loss of nearly 14%) when pundits proclaimed that their growth projections were unrealistic.
It’s difficult to figure out just what industry analysts have based their skepticism on. Since its inception just three years ago Groupon has proven its ability to grow, and the last couple of months since their IPO have been no exception. In the fourth quarter of last year their growth was even higher than projected, largely due to a holiday season that saw more sales than previous years, despite the ongoing recession. Of course, the company hedged their bets somewhat with special deals (their “wintertime celebration”) although in reality the season was enough to give them a bump. However, they have projected their earnings will increase by about 5% in the first quarter of 2012 (from approximately $510 million to $550 million), and it seems that trajectory is troubling to both analysts and investors.
In truth, the problem is multifaceted. Concerns were raised early on that Groupon could not sustain growth after IPO for several reasons, but the main argument initially centered on the fact that their business model is all too easy to duplicate. In fact, there are several other DOTD sites out there doing the exact same thing (although Groupon got the jump on competitors and their name has virtually become synonymous with DOTD). In addition, they had some early hassles with the SEC when it came to accounting practices, leading them to revise their earnings statement to show only their “take home” rather than the whole price customers were shelling out for deals (only a portion of which goes to the site as revenue). And then there was the little matter of their adjusted fourth-quarter loss. It only amounted to two cents per share and it was based on an unexpected hike in international taxes, but that didn’t stop naysayers from making a mountain out of a molehill.
Still the company has a lot going for it, and initial investors don’t seem to be selling their stock or demanding additional oversight (no merchant warehouse reviews for this company). Not only did earnings exceed expectations in the fourth quarter, but they reduced marketing costs while increasing revenues, even during their push to expand overseas. In addition, analysts report that customers show no signs of “deal fatigue”, meaning that they will likely continue to support the service. And since their IPO, in which shares were offered at $20, the price of stock has dropped as low as $14.85, but also gone as high as $31.14. It is currently hovering around the $21 mark. And even beyond that, the company showed double-digit growth in every quarter last year, so their estimates of 5% growth in Q1 of 2012 could actually be considered conservative. However, pundits see it as a sure sign that Groupon’s growth is slowing. This is certainly possible, but considering their financial history, it’s much more likely that they’ll blow their own projections out of the water.
Evan Fischer is a freelance writer and part-time student at California Lutheran University in Thousand Oaks, California.