Felix Salmon

Kickstarter’s mission creep

Felix Salmon
Mar 12, 2012 16:11 UTC

I had a fascinating conversation last night with a chap from Kickstarter, a site designed to help creative professionals realize projects. And it’s still doing that, pretty well. But there’s clearly a degree of mission creep at Kickstarter, too — especially with regard to some of the most successful and highest-profile projects on the site.

“A project is not open-ended,” says Kickstarter: “Starting a business, for example, does not qualify as a project.” Yet that’s exactly what Matter is doing with Kickstarter.

What’s more, Kickstarter can only be used to fund projects “from the creative fields of Art, Comics, Dance, Design, Fashion, Film, Food, Games, Music, Photography, Publishing, Technology, and Theater”. Which one of those fields is a bar of soap supposed to fall into? Design, I guess. But if the fields of Design and Technology can be so broadly construed as to mean anything, they ultimately mean nothing. And the bar of soap — just like Matter or the famous $1.5 million iPhone dock — is at heart an attempt to start a business, much more than it is an attempt to fund a creative project.

The bar of soap and the iPhone dock are glossy and sophisticated sales pitches: one of the questions yesterday was whether they were closer to SkyMall or to QVC. But there’s a huge difference: SkyMall and QVC sell products which exist. On Kickstarter, you’re buying a hypothetical future product. And I worry that this is going to end in high-profile tears and recriminations at some point, the first time a big funded project fails to produce what it promised.

Getting a product to market is hard. Even companies with business plans and executives and millions of dollars in funding — and a fully-functioning product — can fall down on that front. Look for instance at the Switch lightbulb: in July 2011, Farhad Manjoo of Slate said it would go on sale in October 2011 for $20. In August 2011, Dan Koeppel of Wired magazine ran an article saying that the bulb would go on sale in October for $30. But here we are in March 2012, there’s still no sign of the thing, and the company’s Facebook page is filling up with comments saying things like “I’m going to start my own company making a product that no one can buy. Hmm….what should I not sell? So hard to decide.”

There are two big hidden risks which I think that Kickstarter should emphasize much more than it’s presently doing. The first is on the side of the person with the project. It’s easy, when you’re trying to raise funds, to promise lots of things to lots of people, in that glorious utopian future where you’ve raised the cash that you need and you can actually finish your project. So then you finish the project, and you’re still incredibly busy and stressed, but now you have hundreds or even thousands of things to send out. Which can be a decidedly unpleasant chore. Kickstarter buries its page warning about how shipping “may end up being a bigger part of your budget than you thought”, and doesn’t really talk at all about the massive time commitment involved. For rewards which are individually hand-made, the result can be something much sloppier than the project owner originally intended. Which isn’t really good for anybody.

The bigger risk, however, is on the side of the funder — and that’s the risk that the project will get funded, you will spend your money, and you will end up getting nothing in return. For original-concept Kickstarter projects, that’s probably OK: you supported the arts by funding an artist, and you hoped to get a memento of that funding, but the reward was just a reward, and not necessarily the main reason you funded the project. For things like bars of soap and iPhone docks, however, the great majority of the funders are thinking of themselves as buying a thing. And they’re not properly discounting the very real risk that they will end up with nothing at all.

Even the most well-intentioned projects can run into unanticipated obstacles, some of which could be fatal to the project. And of course there’s the risk too of outright merchant fraud. You put together a glossy Kickstarter video, raise a few hundred thousand dollars, and then just pocket the money while telling everybody that the project is taking longer than expected.

In either situation, your funders have very little recourse. They may or may not, at some point, be able to get a refund from their credit-card company, if they paid with a credit card. But it’s extremely unlikely that they’ll be able to get a refund from the project owner.

Kickstarter doesn’t keep statistics on the number of projects which get funded but not completed, or the number of projects where funders fail to receive what they were promised. It’s hard to know how such statistics could possibly be generated, since projects don’t come with deadlines by which the rewards are deliverable. I, for one, have a number of Kickstarter receivables coming to me; I don’t have them listed anywhere, however, and if they don’t arrive, I’m not going to be particularly upset. There are 12,521 people expecting an iPhone dock, however, and 21 of them have paid upwards of $5,000 to receive 100 docks or more. If I was expecting a shipment of 100 iPhone docks, I’d consider that a real business contract, rather than a much fuzzier form of support for some creative project.

The JOBS act which recently passed in the House would allow Kickstarter to allow project backers to receive equity, rather than specific rewards, in return for their money. The regulatory and compliance costs for Kickstarter would surely be enormous, but might well be worth it, given that SecondMarket is now valued at $200 million. But before Kickstarter moves into the realm of equity stakes, it should probably start thinking much harder about the way in which it’s becoming a shopping site. Because if it doesn’t have a good way of regulating the people on its platform who are fundamentally just selling things, then it’s going to have a really hard time becoming a platform for people selling ownership stakes in companies.


At iPledg (http://ipledg.com/) we do not judge the projects submitted. We feel this is the role of “the crowd”. As long as the project meets the crtieria set out in our project guidelines (largely covering the legal and moral outlines) then we are happy for the crowd to determine the suitability for it to receive exposure and funding. And isn’t that the essence of Crowd Funding??

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Chart of the day, Facebook IPO edition

Felix Salmon
Feb 14, 2012 16:49 UTC

There are two ways of looking at the $5 billion or so that Facebook is going to raise in its IPO. One is to ask what on earth the company is going to do with all that money: it’s already making substantially more in the way of profits than it is likely to want to spend, and the chances are that the $5 billion is just going to go straight into the bank, where it will earn roughly 0.77% per year. This is not the best use of shareholder funds, and it’s hard to see why Facebook’s CFO would want the cash pile to be any bigger.

On the other hand, $5 billion is very small as a percentage of Facebook’s market capitalization. Here’s Allan Sloan:

If Facebook’s offering ends up being the advertised $5 billion, and the company’s stock market valuation is in the expected $75 billion to $100 billion range, it means that only 5 to 7 percent of the company’s shares will be available to public investors.

While there are all sorts of rationalizations for having such a small public offering relative to a company’s size, the real reason, as any Street insider will tell you, is to create an initial shortage of stock so that the share price runs up when public trading starts.

It’s not enough for Mark Zuckerberg & Co. to have created an amazing, incredibly valuable company over an incredibly short period. They feel the need to use this tacky market trick to drive up Facebook’s value even more.

Sloan has a point, here: it’s very rare for companies to go public while selling less than 10% of their stock. Here’s a chart from Thomson Reuters, showing the free float at IPO for all US issues from 1/1/2000 onwards which had a market capitalization at IPO of more than $1 billion.


As you can see, it’s very rare to go public with a float of less than 10% of the company: the average for tech companies is 19%, and the overall average is 26%.

And if you look at IPOs which raise more than $500 million, the percentages get bigger still: if you’re raising more than half a billion dollars, then tech companies end up with a free float of 34% of their company, on average, while overall, companies float 43% of their shares.

So, is Sloan right? Is Facebook’s small free float a “tacky market trick”?

My feeling is that it isn’t — and that it’s rather a function of the way in which Facebook stock is distributed. Since the company doesn’t really need to raise equity capital, the only other way to increase the free float is to persuade existing shareholders to sell their stock into the IPO. Mark Zuckerberg certainly doesn’t want to do that — to the contrary, he wants to retain as much stock and control as possible. And most of his fellow shareholders are similarly rich and fond of their stock, preferring to wait a while before selling.

In other words, what we’re seeing here is the natural consequence of what happens when the stock market essentially forces companies to be profitable before they go public. In the olden days, when companies went public because they needed the money, they would sell quite a lot of stock. Today, that’s no longer the case, especially in Silicon Valley, where capital-raising rounds are generally done privately, with VCs. If Facebook hadn’t been able to raise well over a billion dollars privately, then it might have gone public earlier, selling more of its stock in the process. But given the way that equity investing in early-stage companies has moved from the public to the private markets, what we’re seeing is pretty normal, and not really a tacky market trick at all.


Anybody who buys stock in a company where the founder retains voting control and ivnestors have no ability to oust management is a fool…

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Why Apple’s cheap

Felix Salmon
Dec 5, 2011 22:17 UTC

I’m going to take one last bite at the Apple valuation question, since I’m happier now about why Apple’s trading where it’s trading than I was when I wrote my original post.

The first thing to note, as pointed out by Tadas Viskanta, is that Apple’s now a megacap, and that changes quite a few things. Consider, for instance, the iPod. It was a real game-changer in the history of Apple — the thing which moved the company out of providing expensive computers to people who wore a lot of black, and into a much bigger consumer space. The iPod changed the way the world listened to music, it helped to revolutionize the music industry, and it ultimately begat the iPhone.

The story of the iPod is now pretty much over, which means that we have a pretty good grasp of how much money has been spent on iPods over the course of their natural life. The answer is about $55 billion.

Now that’s an enormous number. If you reckon that 45% of that $55 billion is profit for Apple, then Apple has made about $25 billion in profit from the iPod in the ten years since it was launched — call it $2.5 billion per year on average. On the day the iPod was launched, Apple had a market capitalization of $6.3 billion — so it’s easy to see how a new product with $55 billion in sales and $25 billion in profits would do amazing things for the stock.

Today, however, Apple’s market capitalization is $362 billion. If the company invents a new product which is just as successful as the iPod, and which makes Apple just as much money, and which is completely unanticipated by the market, how much should the stock rise? The present value of $25 billion in future profits is still substantial — but even if you put it at $20 billion, that just gooses the share price by 5% or so. If you look at Apple today, the company’s cash in the bank — its liquid assets — is a significantly larger number than the total revenue it’s made from every iPod ever sold.

If you grow to 50 times your previous size, your new products don’t become 50 times more successful. Or even 10 times more successful. Apple, like all companies, has certain economies of scale, and it has millions of people devoted to its ecosystem. But the market isn’t going to give it credit for having a pipeline filled with unknown products that are going to be bigger than the iPod. The iPad will evolve; the Apple TV will get Siri voice control; the computers will get faster and thinner. All of these things will be profitable for Apple — the company’s not going away any time soon. As Horace Dediu puts it:

The consensus is that the value of future, unknown products is zero. Not only that but the probability that there will be any products at all is equally zero. Not only that but whatever Apple does to create new products is not perceptibly valuable. The company is simply the sum-of-the-product-parts and nothing more.

Dediu reckons this is silly — “like valuing Pixar on the box office revenues of its current movie”. But as his chart shows, it’s pretty much impossible to compete with iOS devices on a profitability basis. Look at the thin yellow line for music: Apple’s the biggest music merchant the world has ever known, and music sales barely register on its P&L.


More generally, the entire market for megacaps has been utterly miserable for the past decade, and Apple’s p/e has naturally shrunk as it has joined the ranks of the dinosaurs. If you picked a member of the S&P 500 at random on March 24, 2000, it has risen by 66% since then. While the index as a whole has fallen by 19%. That’s entirely a function of the megacaps performing atrociously, even as the rest of the index did reasonably well. On average, megacaps (the S&P 100) trade on a p/e of 18.6; right now, they’re at 12.1. I’m not going to hazard a guess as to why that should be the case, but it stands to reason that Apple is just as susceptible to the phenomenon as any other megacap.

And then there’s the question of what kind of asset Apple stock really is. Equity is permanent capital, of course, and the best stocks are the ones you buy and forget about and leave to your grandchildren. But it’s frankly hard to imagine that Apple is going to be one of the most valuable companies in the world in 50 years’ time. It has a lot of room to grow, to be sure, but it just doesn’t feel like the kind of company which lasts forever. On top of that, Apple doesn’t pay a dividend.

Put those two things together and you have a trading vehicle, rather than a long-term play. Buy now, and sell when it reaches X. But the problem here is that no one has a clue what X might be. And if Apple is fundamentally a stock for speculators, rather than a buy-and-hold investment, then at that point things like p/e ratios cease to matter: all anybody cares about is momentum, and whether it’s going up or going down.

Apple never made it as a computer company; its big resurgence took place when it became an iPod/iTunes company. And just when that revenue stream started looking tired, the iPhone came along to turbocharge everything. The iPhone and iPad will be around for a while, I’m sure. But then they’ll be gone. And that will be the end of Apple’s megacap days — unless the company can pull yet another new product out of its hat, and one which can bring in billions of dollars of profit every quarter, at that. I wouldn’t bet against it. But I can see why the market might be reluctant to bet on it, before anybody really knows what that product might be.


* an analysis. Please add an edit feature.

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No dividend, no worries

Felix Salmon
Nov 30, 2011 01:52 UTC

Karl Smith made a funny point in response to my post about Apple’s falling p/e ratio: since Apple’s not returning any money to shareholders in the form of dividends or buybacks, he says, shareholders aren’t getting any return on their investment.

Unfortunately, Matt Yglesias didn’t seem to get the joke:

The crux of the matter, as I see it, is Apple’s ever-growing cash horde which went from $70 billion in liquid assets at the end of Q2 to $82 billion in liquid assets at the end of Q3. The company is earning huge profits, which is great, but since it seems determined to neither return those profits to shareholders nor to re-invest them in expanded operations it’s hard to see how investors aren’t going to discount the value of the enterprise.

This is trivially wrong. If Apple’s cash pile is growing, that will increase its p/e ratio, rather than decrease it. On April 20, Apple reported Q2 earnings of $6.40 per share, or $20.98 over the previous 12 months. It closed the following day at $350.70, which corresponds to a p/e of 16.7 on a TTM basis. On July 19, Apple reported Q3 earnings of $7.79 per share, or $25.26 over the previous 12 months. It closed the following day at $386.90, which is a p/e of 15.3 on a TTM basis. The earnings were up, the price was up, but the p/e ratio was down.

Now Apple has roughly 1 billion shares outstanding, so let’s say that its “cash horde” went from $70 per share to $82 per share over the course of the third quarter. That’s more than 20% of the share price, right there. Take the cash away, and the p/e ratio falls to just 12. Even if you value the cash horde at just 50 cents on the dollar, the p/e ratio still falls, to 13.7 from 15.3.

It’s possible that shareholders would like to receive the cash as a dividend payment — although if and when that ever happens, they will have to pay income tax on it. They might even value Apple more highly if they can see themselves getting a modest income from their Apple stock without having to sell any shares. But we’re talking very marginal effects here: there’s no real sense in which turning a dollar of cash into a dollar of dividend payment increases the value of a company. Indeed, once the dividend is paid, the stock price will go down, since it no longer reflects the value of that cash.

I suppose it’s theoretically possible that investors are valuing Apple’s cash at zero, on the grounds that they’re never going to see any of it. But even if they are valuing the cash at zero, that doesn’t change Apple’s p/e ratio, which is still falling. What makes no sense is Yglesias’s idea that Apple with zero cash would somehow be worth more than the same company with $82 billion in the bank.

Smith’s point is a bit more subtle, and is probably best expressed in terms of the theoretical idea that a company’s share price should equal the net present value of its future dividends. If it never pays a dividend, and will never pay a dividend (or get bought), then the value of the company is zero.

I’ve been critical of Berkshire Hathaway’s no-dividend policy, but largely because the company’s shares are so ludicrously expensive that you can’t raise cash by selling just a few of them. Anybody who started with a decent Apple shareholding and then rebalanced annually to keep Apple a certain percentage of their total portfolio would indeed have received very healthy cash dividends, over the years, from the proceeds of all the shares they sold. And meanwhile, Apple’s shareholders get to hold on to all of the company’s earnings tax-free. (In fact, insofar as those earnings are kept overseas, they’re saving on tax twice: first when Apple repatriates the money and pays corporate income tax on it, and secondly when they pay personal income tax on their dividend income.)

It’s very easy, of course, to run a discounted cashflow model on Apple: such things model earnings, not dividends. And although there are some mutual funds which only invest in stocks which pay a dividend, I don’t think their absence from Apple’s shareholder base explains any part of its low p/e ratio.

And in any case, the joke behind Smith’s post is just that even if the lack of a dividend can explain a depressed p/e ratio, it can’t explain a falling p/e ratio. No one expected Apple to pay any dividends two years ago, when the stock was trading on a p/e of 32. Why should they suddenly care about such things now?


Another point is that the book value of Apple is increasing as they hold on to retained earnings. Assets, after all, do have value. Especially cash. If they are able to continue growing revenues without reinvestment of capital, why not keep the asset as cash? In the future if Apple finds a project they estimate will warrant an investment of capital for lucrative future returns in a more friendly business climate, they will have the capital on hand to do so. Why invest the money now in an unfriendly business climate with a low expected return? Obviously, Apple sees what a lot of other businesses see now, regardless of political rhetoric. There is not a lot of confidence that in the future, there will be a market for the public to adopt new innovations in a stagnant economy. If the risks of the cash investment losing value didn’t outweigh the probable expected return on the reinvestment, they would be reinvesting. If all it took to raise a stock price was to pay dividends, every company would be paying out everything they could in dividends. Plus the tax implications already pointed out.

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Chart of the day, Apple valuation edition

Felix Salmon
Nov 28, 2011 16:39 UTC


Andy Zaky at Bullish Cross has a great post on Apple’s valuation, showing the astonishing degree to which the market is discounting the value of a dollar of Apple’s earnings today, compared to just two years ago. Back then, it was worth $32; now, it’s worth just $13. In the eyes of the market, Apple earnings are worth less than those of Cisco, Comcast, IBM, or AT&T, and are worth just 13% of the earnings of Amazon.

All of which raises the obvious question: why is Apple trading at such a seemingly depressed level? I have a few ideas, none of which are particularly compelling.

  1. It’s run out of buyers. The Apple bull run has been going on for so long, at this point, that anybody who wanted to buy it has bought it already. And they’ve done pretty well by doing so. If they want to rebalance so that they keep their Apple holdings constant as a percentage of their total portfolio, they’re more likely to be selling than they are to be buying.
  2. We’re all long Apple already. Apple is now firmly ensconced in its position as one of the two most valuable companies on the US stock market, in a world where ETFs and index funds are only getting more popular. As a result, if you’re long the S&P 500, you’re long Apple in quite a big way. And a large amount of the trade in Apple is going to be index-arbitrage trading. This is inevitably going to increase the correlation between Apple and the S&P 500. And when the S&P 500 has much lower earnings growth than Apple, that’s going to act as a drag on Apple’s share-price growth.
  3. The headline share price is high. This shouldn’t matter, but it does. Small investors feel a bit weird about spending $2,500 on Apple stock and getting the grand total of seven shares in return. And the high share price sends a message to bigger investors, too: it says that Apple isn’t in the business of managing its share price, and is not about to engage in shenanigans like stock buybacks. Indeed, the market shouldn’t even expect a dividend any time in the foreseeable future, despite the fact that Apple clearly has more cash than it knows what to do with.
  4. The headline market capitalization is high. When a company is worth $340 billion, a 10% rise in the share price means that the stock market has created $34 billion of new wealth. Which is harder than creating $3 billion of new wealth.
  5. The appeal of the mean-reversion hypothesis. Apple can’t go on increasing its rate of earnings growth forever; indeed, it can’t even sustain its current level of earnings growth very long. It’s so big, and has come so far, and is making so much money, that at some point the only way to go is down. This is true on a conceptual level, but I don’t think it’s true on a practical level: Apple’s market share is still pretty small in the US, and positively tiny in the rest of the world. There’s a lot of growth potential left in this company, as smartphones increase their global penetration and as more people move from Windows to Macintosh.
  6. Steve Jobs is dead. Apple’s p/e ratios started shrinking at about the same time that Jobs did, and all the hagiographic attention on how unique Jobs was only serves to remind us that he’s not around any more. If the next generation of Apple products is a success, people will still give Jobs the credit, and worry that Tim Cook won’t be able to replicate Jobs’s achievements. It’s going to take a long time before Cook can truly own the company and come out from Jobs’s shadow; in the meantime, investors are naturally going to worry that the glory years are over.
  7. Apple’s earnings come from the frothiest, most disposable part of consumer income, which is the first part of consumer spending to go away if and when the economy heads south. As such, Apple’s more vulnerable to an economic downturn than most of its peers.
  8. There isn’t a real bear case for Apple: the closest thing I can find is all technical-analysis astrology. And the way that markets work, stocks are much more likely to rise when people are bearish than when they’re bullish. No one seems to think that Apple is actually overvalued; indeed, analysts are ratcheting up their earnings forecasts at an astonishing pace. Here’s a table from Bill Maurer:


Estimates are up 12% over the past 90 days for the first quarter of 2012, and they’re up 7.5% over the past 90 days for the full year. This also helps explain the compression in forward p/e ratios.

What’s certain here is that the market simply isn’t rewarding Apple for its astonishing level of earnings growth of late. Which is weird, since that kind of earnings growth really wasn’t priced in a couple of years ago. Zaky’s convinced we’re seeing a market failure here, and I’m not convinced he’s wrong. But I’d be happier if someone could persuade me that there’s actually a good reason why Apple earnings seem to be worth so much less than so many of Apple’s less-successful peers.


Well put fifthdecade, exactly what I believe is the real reason for AAPL low P/E — the big fund managers really don’t understand Apple, they still remember the insanely overpriced Mac of the 80′s losing out to MS and think that Apple will be wiped out by the new MS’s : Google Android and Amazon Fires. What’s wrong with actually trading on fundamental facts instead of complete guesswork of we’re Apple will be years from now. After all if Apple ‘s fundamentals based on hard facts start slipping it only takes a few seconds to make a trade, but the fundamentals so far show plenty of continuing growth.

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Chart of the day, tech-stock edition

Felix Salmon
Nov 23, 2011 22:22 UTC


Paul Kedrosky reckons that Groupon’s the worst-performing internet IPO since Netflix, in 2002. He’s wrong: Groupon is doing even worse than Netflix did. It’s now trading at 85% of its IPO price; Netflix, by contrast, was still a tiny bit above its IPO price at this stage in its volatile history. (The chart above shows how Netflix performed in its first year as a public company, compared to its IPO price.)

If Netflix is any indication, Groupon is going to trade significantly lower than its current level before it ever recovers. Netflix went public at $15 per share, at the end of May 2002; on October 9 of that year it closed at just $5.22. Which is $2.61 in current prices, since it subsequently had a 2-for-1 stock split. That makes today’s closing price of $68.50 look positively healthy, the stock’s precipitous recent drops notwithstanding.

What this chart really shows, of course, is just how difficult the stock market’s job of price discovery is. In the early days of a technology company’s life as a public company, the stock price can move quite violently.

And with Groupon we should expect especially violent moves, for two reasons. Firstly, the float is tiny; and secondly, there’s a very loud and vehement class of Groupon bears who are desperate to short the stock and are convinced it’s going to zero. They might even be right. But my main point here is that looking at the Groupon share price on a day-to-day basis is a very good way to go slightly mad.

Groupon’s share price doesn’t reflect new news about the company; it’s more akin to a volatile random-number generator. If it goes down, that doesn’t mean that Groupon is a bad company; and if it goes up, that doesn’t mean Groupon is a good company.

This is one reason why technology companies hate going public: they start getting judged,first and foremost, on the one thing they have no control over, which is their share price. And tech-company share prices in general have been doing very badly in the post-IPO period of late. Why on earth would anybody want to join the likes of Demand Media or Renren, both of which are far below their IPO price? Some companies, like Facebook, have so many shareholders that they’re forced to go public. Others have VC backers twisting their arms. But if you have a choice in the matter, most sensible tech-company CEOs are likely to put off an IPO as long as they possibly can.


In this case, Seth, the basis for comparison is the IPO price. It isn’t intended as an IRR graph.

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Groupon’s pop

Felix Salmon
Nov 4, 2011 14:46 UTC


With Groupon spiking at the open to $28 per share, this post is likely to get even more coverage. Stocks with big opening-day pops, it seems, tend to fall dramatically thereafter. Which bodes ill for anybody buying Groupon at these levels.

But I hate the chart which accompanies the post. It looks as though there is only one x-axis, which goes from -100% to +200%. If a line goes to the right of zero, that means it’s above its IPO price, and if a line goes to the left of zero, that means it’s below… um… not its IPO price, actually. In fact, we’re never told exactly what the red and green lines are measuring.

I think — and I’ve gone back and forth with Mark Gimein, the author of the post, on this — that it’s measuring the price action from the opening tick through Nov 2. In other words, it’s showing how the stock did over and above its opening pop: where there’s a green line, the stock opened high and then just went higher.

In any case, the good news for Groupon buried in this chart is that if you take the 25 stocks with the biggest opening-day pops, they’re up by 9.25%, on average, from their offer price. So given Groupon’s a big pop, there’s a very good chance that it’ll be above $20 per share for the foreseeable future. And remember that the conventional wisdom, as of a day or two ago, was that Groupon was worth maybe $5 billion tops, or somewhere in the $8-per-share range. Instead, even if Groupon falls back towards $20 from here, it’s still likely to be worth an eleven-figure sum for the foreseeable future.

This is good news for me, too. I have a bet on with Rocky Agrawal: if Groupon is worth more than 30% of the value of Priceline on October 31, 2012, then he owes me dinner. Right now, Groupon is worth 72% of the value of Priceline. So I have a nice cushion. At least for the time being.


sorry felix – I reread your “bet” and now I understand where I misunderstood. 30% of the value of priceline – not 30% MORE than the value of priceline…

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How to justify Groupon’s valuation

Felix Salmon
Oct 27, 2011 21:27 UTC

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.


Agreed with 2contango. Groupon’s business model relies on:

(1) The willingness of restaurants and other businesses to offer a 75% discount in the hope of attracting repeat customers at the full price.

(2) The inability of competitors to elbow in and offer either restaurants or consumers a better deal.

(3) Cutting costs sufficiently to turn an operating profit.

I’m personally puzzled at their inability to turn the 75% discount into a profit. Admittedly they pass the majority of that along to the customers, and spend even more on convincing new customers to sign up with them, but it shouldn’t be THAT expensive to attract business. And if it is, then your business might not be as promising as you hoped.

A month ago we received a Groupon (actually a look-alike competitor) offer for a local restaurant that we’ve already visited a couple times and enjoyed. Still didn’t bite because the setup ultimately seemed to be more hassle than it is worth.

Will be hard to build a $10B business on that.

Posted by TFF | Report as abusive

Market inefficiency of the day, Irish bank edition

Felix Salmon
Oct 26, 2011 19:01 UTC


You won’t be surprised to hear that shareholders in Allied Irish Banks have not done very well for themselves in the past five years. It did go bust, after all, and had to be nationalized; the share-price chart is above. But recently, as part of the recapitalization of the bank, the number of shares outstanding rose dramatically. Here’s the announcement, which doesn’t quite spell things out:

The Capital Raising will comprise an equity placing (the “Placing”) of ordinary share capital of €5 billion to the NPRFC and an issue of up to €1.6 billion of contingent capital convertible notes (the “Contingent Capital Notes Issue”) to the Minister. The Placing will comprise an issue of new Ordinary Shares for cash at a price of €0.01 per share.

If you do the math, you can see that injecting €5 billion of capital at €0.01 per share means that 500 billion new shares were created. And ever since those shares were created, if you multiply the shares outstanding by the share price, you can see that technically the market capitalization of AIB is somewhere north of €30 billion! Here’s the same stock, only this time charting market cap rather than share price:


Even when a bank has been nationalized, there are good reasons for the shares to continue to be traded. For one thing, it’s helpful when you’re handing out equity to senior management; for another, it’s very useful if and when the time comes to try to privatize the bank and take it off the government’s hands. So at some point there’s going to have to be a reverse stock split, with the shares trading for some sensible amount.

But right now, the shares are genuinely trading at somewhere over €0.06 a piece — and indeed have risen in value quite dramatically over the past three weeks. I have no idea what the mechanism is here, or who’s buying these shares, but if you want proof that markets aren’t always efficient price-discovery mechanisms, this has got to be Exhibit A. It would help of course if these shares could be shorted, but that still doesn’t explain why people are buying at these levels.

(Thanks very much to Patrick Brun for the tip and the data.)


I would avoid making statements about market efficiency when the float is extremely small (0.6%), trading volume is extremely small (€200k worth of shares today), and the stock can’t be borrowed and shorted.

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