With Groupon’s announcement Thursday that it plans to offer stock to the public, you might have visions in your head of doubling your money overnight, the way some investors did when LinkedIn went public last month.
You probably will never get a chance to find out. Highly anticipated stock offerings like Groupon’s are typically allocated by stock brokers only to their biggest and best customers, including big investment funds and “high net worth” individuals.
Ordinary investors often are left out and forced to buy the stock on the secondary market, after it already has gotten its opening-day “pop.”
In any case, you might think twice before buying Groupon stock. Few companies have ever grown as fast as Groupon, and it is impossible to say what the future holds for its novel business model.
Here are six reasons not to buy Groupon’s stock chosen from among dozens of risk factors listed by company executives (and lawyers, no doubt) in the offering prospectus filed with the Securities and Exchange Commission.
Groupon loses money, by the fistful
Groupon lost $102.7 million in the first quarter of this year on top of $389.6 million in losses last year. The company has accumulated a deficit of $522 million since its inception in 2008. That is despite generating gross revenues of $645 million in the first quarter and $713 million last year (much of which is passed on to merchants). "We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis," the company said in its filing.
Groupon may be growing too quickly
The company has gone from $30 million in gross revenues in 2009 to $713 million last year to a run rate of $2.6 billion now. The company has more than 7,100 employees, up from 37 less than two years ago. The company said it depends on the services of its chief executive and co-founder Andrew Mason, chairman and co-founder Eric P. Lefkofsky and chief financial officer Jason Child. “We are seeking to hire a significant number of personnel in 2011, including certain key management personnel," the company said. "If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.”
Groupon is betting heavily on international sales
Groupon generates more than half its revenues from international operations, up from approximately zero a year ago. The company, which now operates in 42 countries, plunged into overseas operations in May 2010 with the acquisition of CityDeal Europe. More than three-quarters of the company’s employees are now devoted to international operations. CityDeal's founders, brothers Oliver and Marc Samwer, are under contract as consultants to Groupon only through October 2011. The Samwers and entities related to them own 10.3 percent of Groupon’s voting stock.
Groupon faces a lot of competition
The company acknowledges that “there are no significant barriers to entry” in its field. Internet giants Facebook, Google and Microsoft are all considered competitors. (Msnbc.com is a joint venture of Microsoft and NBC Universal). The company also competes with many other websites and traditional media companies. With its fast-growing army of more than 7,000 employees selling the company’s services, Groupon appears to enjoy first-mover advantage in many markets, but rivals boast far more users than the company’s 83 million subscribers.
Groupon faces an uncertain regulatory status
Groupon is the widely acknowledged leader in a new product category, selling certificates that may be regulated as gift cards or prepaid cards. The products may be subject to federal laws including the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), which may affect their stated expiration date, for example. (Maybe that’s why the company sends out e-mails reminding you to use your Groupons.) The company also has encountered unexpected state regulations, such as a notification from the state of Massachusetts that some restaurant discounts in that state might violate liquor laws. The company also mentioned potential regulation in Europe, which has laws governing “electronic money institutions.” The company said it faces several lawsuits over its compliance with the CARD Act.
Customers could move on to the next big thing
Groupon has only been around for a little over two years and has enjoyed astonishing growth with few noticeable setbacks. Yet there is no assurance that it can continue to add subscribers and merchants at the same rate, or that existing customers will remain interested in the offerings. “Our ability to retain or increase our subscriber base and revenue will depend heavily on our ability to innovate and to create successful new products and services,” the company said.
Full text: Read the complete prospectus at the SEC's website