How to justify Groupon’s valuation

By Felix Salmon
October 27, 2011
Henry Blodget has a smart post on how to value Groupon today. Is he right that it's vastly overpriced at a $10 billion valuation?

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Henry Blodget has a smart post on how to value Groupon today. Is he right that it’s vastly overpriced at a $10 billion valuation?

Blodget’s main thesis is that revenue growth at Groupon is slowing — and that transitioning from a high-growth company to a relatively modest-growth company is something which tends to hurt stocks. He’s the expert on such things; I daresay he’s right. But just for the sake of symmetry, here’s a simple bull case for Groupon, and for how it could get its really high revenue growth back.

Basically, Groupon’s been involved in a race to get a huge email list together; its revenues have largely tracked its subscriber base. After all, if any given deal is going to be bought by X% of your subscribers, then your revenues are going to be directly proportional to the number of subscribers you have.

Recently, Groupon has found that its earliest subscribers were its most valuable subscribers, and that it’s getting diminishing marginal returns from the 100 millionth subscriber. So it’s spending less money on acquiring new subscribers, and that’s feeding into fewer new subscribers and slower growth.

But Groupon has its huge subscriber base now — which means it’s ready to attack Phase 2 of its plan, and really start monetizing them.

Think of it like this: up until now, Groupon has been selling daily deals to customers. And it’s now ready to pivot, and start selling customers to merchants on many other fronts.

Right now, customers don’t spend all that much money on Groupon: in the first three quarters of 2011, its 142,865,836 subscribers spent $2,754,633,000 in total. That’s an annualized rate of about $25 per year. People love deals, but it turns out that the model of showing them one deal a day in their inbox is always going to limit how much they’re ever going to buy.

So Groupon is branching out into various other projects, all of which promise to increase customer spend dramatically — travel deals, high-priced goods, spur-of-the-moment impulse buys, you name it. Not all of them will work. But there’s a decent chance that some of them will. And if that happens, Groupon could easily become as valuable as, say, Priceline, which has a market capitalization of $24 billion. If you look at the size of the customer base, and the loyalty of those customers, it’s hard to make a case that a mature Priceline is five times more valuable than a mature Groupon. After all, Priceline is much more constrained in what it sells than Groupon is, and it reaches fewer people.

Which is not to say, of course, that Groupon is a buy at a $10 billion market cap. But I can easily see how such a thing could be justified, if the business goes according to plan.

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