Groupon: Is there Any Value in Coupons?

• Groupon has demonstrated impressive growth in the past year – its TTM revenue went from $2.44 billion in third quarter 2013 to $3.0354 billion third quarter 2014.
• Despite the revenue growth Groupon reported a net income of -$163.13 million.
• Groupon reported that its customer base grew by 24% between third quarter 2013 and third 2014.
• The net income figure shows that the acquisition of Ticket Monster has not helped Groupon’s bottom line.

Groupon (NASDAQ: GRPN), the Chicago-based online coupon company, has been attracting a lot of attention lately because of news reports that claim Goldman Sachs Group (NYSE: GS) could be interested in buying all or part of Groupon’s Korean-based subsidiary, Ticket Monster. Naturally this has generated a lot of attention from investors and raised the all import question: is there any real or potential value in Groupon or online coupons?
That question is hard to answer because Groupon’s business is growing very fast, but it does not seem to be making any money. The company claims that its customer base grew by 24% between third quarter 2013 and third quarter 2014. It also claims that it now has 300,000 active deals worldwide and that the amount each customer spent rose by $8, from $141 to $149, between third quarter 2013 and third quarter 2014.

Questionable Revenue Growth

These figures did translate into some very impressive TTM revenue growth at Groupon. The company reported a TTM revenue of $2.44 billion in September 2013 that grew to $3.035 billion in September 2014.

There is a problem with this revenue growth; in this slide presentation, Groupon itself admits that the customer spending increase was largely driven by the Ticket Monster acquisition. Groupon’s management is admitting that the only way that it can make money is through acquisition of other companies.

News reports indicate that the only reason why Goldman Sachs is interested in Groupon is because of Ticket Monster. That means if you take Ticket Monster away, there seems to be little value in the world of Groupon.

Groupon’s net income figures support this thesis and raise serious doubts about the company’s revenue and its business model. In September 2013 Groupon reported a net income of -$95.13 million; in September 2014 Groupon’s net income had fallen to -$163.13 million. The net income figures show us that Groupon keeps losing more and more money.

Groupon Has No Float

They also indicate that Groupon has not been able to successfully monetize its coupon business. Instead of generating float, the coupon business seems to be a black hole sucking in more and more money.

What’s even more bothersome is that Groupon reported a free cash flow of $25.26 million on Sept. 30, 2014. Okay, that’s better than September 2013 when it reported a free cash flow of -$26.97 million.
A free cash flow of $25.26 million on revenues of $3.035 billion indicates that Groupon is generating little or no float from its coupon deals. The company’s business model seems to be to generate float from the coupon, yet the free cash flow shows us that is not happening.

It is also why Groupon had a TTM return on equity ratio of -21.4% on Sept. 30, 2014. That ratio has gotten worse over the past year; in September 2013 Groupon reported a return on equity ratio of -12.2%. Groupon is delivering less and less for investors even as its revenue continues to “grow.”

Instead of adding value to Groupon, the Ticket Monster acquisition has backfired and caused it to lose more money. Groupon has no float and, worse, no means of generating additional float.

Why Does Goldman Sachs Want Ticket Monster?

So what does Goldman Sachs see in Ticket Monster? That’s easy; Ticket Monster, unlike Groupon, is a real business that sells a real product real people want to spend real money to buy. It sells tickets to concerts and sporting events.

Ticket Monster’s website indicates that it is currently selling tickets to NFL, Major League Baseball, NHL, and NCAA games and to concerts. Popular events listed at the site include the Green Bay Packers and Pearl Jam. With the economy growing, people will have more money to spend on luxuries like sports and concert tickets, which could lead to more money for Ticket Monster.

Unlike Groupon itself, Ticket Monster seems to have the ability to generate some genuine float through its ticket sales. It can also attract some real investments because of that float.

The problem here is that Ticket Monster operates in a completely different sector than Groupon does. It sells tickets not coupons. One has to question a company that can only attract investments by going outside of its core business. It is also an indication that Groupon’s business model simply does not work.

Smart investors should stay away from Groupon and wait to see if Goldman Sachs can spin Ticket Monster off into a company of its own. Ticket Monster might be able to generate some value the old fashioned way—by selling a product—rather than a questionable online discount scheme.