With the Groupon IPO looming - and the buzz beginning to build - it may be time to put things in perspective by using other recent (and related) public offerings as comparisons. This of course will put LinkedIn (NYSE:LNKD), Renren (NYSE:RENN), and Yandex (Nasdaq:YNDX) under the microscope, as each of them recently went public. Just for good measure though, Baidu.com (Nasdaq:BIDU), Amazon.com (Nasdaq:AMZN), and Google (Nasdaq:GOOG) will also be examined. None is 'new' by any stretch of the imagination, but all of them were at one point where Groupon is now.
As it stands right now, Groupon's revenue totaled $644 million last quarter. Though the number is growing fast, just for the sake or argument let's annualize that figure and say that's a sign that it will approximately be able to generate $2.5 billion in annual sales. Not bad, though if on annualizes last quarter's $147 million loss, then Groupon could be assumed to be bleeding just under $600 million each year. (It's strictly a thumbnail sketch.)
The filing indicates the company is only aiming to raise $750 million, but in reality, post-IPO Groupon is expected to boast a market cap of - according to estimates - anywhere from $10 billion to $25 billion. Splitting the difference and saying the actual post-public-offer IPO value will be $17 billion, that translates into a hefty price/sales ratio of 6.8. Even using its non-GAAP profit of $82 million last quarter, annualized, Groupon's price/earnings ratio would be a whopping 51.8.... and that's non-GAAP.
It sounds insane, and maybe it is. But, it isn't anything all that unusual for 2011. China's social networking site operator Renren generated $76 million in revenue for 2010, and the company is worth (has a market cap of) $4.8 billion. Profits for RENN are still a maybe/maybe not proposition. Yandex, the Russian search engine, recently issued an IPO that says the company is now worth $11.0 billion on only $440 million in revenue for 2010. That's a price/sales ratio of 20.2. Annualizing last quarter's profit of $29 million for YNDX means the price/earnings ratio is around 96... high even by 1999 standards. LinkedIn is now worth $7.9 billion following its IPO about a month ago, despite only $243 million in revenue last year, and a mere $15.4 million in earnings. That's a price/sales ratio of 34.1, and a price/earnings reading of about 540.
So no, the Groupon numbers aren't out of the ordinary, even if hard to swallow.
Of course, the supporting argument for these crazy valuations is that you own stocks for where they're going rather than where they've been. And, we've seen companies work their way out of similarly overvalued scenarios before to eventually catch up with - and even exceed - their market caps.
Amazon.com is one of them. In 1997 after AMZN went public, the company lost $27 million that year, on $148 million in revenue. In 2010, Amazon earned $1.0 billion on $36.9 billion in sales. That's 249 times more revenue.
In 2001, Google's top line was a mere $86 million, versus $29 billion last year. That's a 300-fold increase in revenue for GOOG, in less than a decade. Baidu.com multiplied its sales by four times between 2007 and 2010, while earnings from BIDU grew by six times over that three year span.
So yes, anything is possible for Groupon now, especially considering the company only generated $44 million in sales for Q1-2010, and that figure hit $644 million in Q1-2011. On the other hand....
Just because Google, Baidu.com, and Amazon.com did it doesn't mean Groupon will inherently be able to do the same. When GOOG, BIDU, and AMZN were all climbing their ladders, investors were getting on board before the high-growth phases. With Groupon, the strong/easy growth has already happened; it would be naive to think the same growth rate will be repeated going forward. Just how strong the forward-looking growth rate will be is unclear, but the fast growth is behind it. Amazon, Google, and Baidu all had their big growth spurts in front of them when they IPO'd.