It wasn't a difficult task for some funds/investors to do the maths: the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc. This implied that (i) either Groupon was a safer investment than the above, or, (ii) that Groupon was completely mispriced. By method of elimination we are left with the later one. Groupon has HUGE execution risks, facing large and tough competition, image deterioration, reducing margins, etc, while still needing to achieve espectacular growth to deliver such value. How can you price something at such a ridiculous valuation when its equity risk is way higher than those other safer investments? To price Groupon at 20usd/share was just wrong. Some of us know how much did Groupon+investors push the underwriters to make this possible, and how many sales calls the equities' desk had to do to get this thing going. No surprise this is going underwater.
> the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc
What do you mean by their "cash yield"?
I thought people investing in Groupon were doing so because they thought it might continue to grow as it had been, and potentially be absolutely massive.
Cash yield doesn't tell the whole story for startup companies, in some cases it doesn't even factor into the equation. YouTube is a perfect example back when they had a monopoly on online video, were growing at 100% a year and were using up their cash at an incredible speed.
A pure cashflow analysis would indicate that YouTube was worthless. But if YouTube stock had been offered on the market at this point, you can be certain that it would have been given a considerable positive value. This is due to the chance that the company would become profitable or make a large exit in the future. You need to also take future revenues (or a chance of future revenues) into account when making a guess at the market value of a company.
You are right, cash yield doesn't tell the whole story BUT it is the only data available to public investors. No public investor has had access to any projections, detailed operating metrics, access to growth drivers and no real information on the use of the IPO proceeds. The stock market is not a place for pure startups. Startups is an asset class that should only be for angel investors, VCs, and other niche funds. If you are selling me the startup story, I want startup returns, i.e. for each $20/share I buy I want to have the "certainty" I will be able to make $200/share in 3 to 5 years. Consequently $200/share is an implied $127bn market cap. Can you see how weak that "Groupon is a startup" argument is?
Having said that, Groupon is not a startup: 7,000+ employees, over $500m in revenues, considerable international presence, large M&A transactions, etc. This kind of company should be be valued using a DCF. Growing at 100% per annum is no excuse to be able to perform such exercise. The devil is in the detail, and trying to find excuses to argue that Groupon is a startup, and consequently valuing it by god knows what random vanity metric is not a valid argument.
Can you give me a data based argument/point that shows that Groupon is not overpriced at $20/share? I have given you one.
Bottom line: all I'm saying is that Groupon should be valued fairly, $20/share is not a fair value, it's overpriced. Investors are left with no upside. I'm not saying that Groupon hasn't got a valid business.
I haven't looked at Groupon's numbers in detail, but yeah, I'm inclined to believe that they are overvalued. I certainly wouldn't buy at this price, the downside seems bigger than the upside.
My original comment was a general comment about startup valuation. I've heard so many arguments on HN that seem blatantly incorrect about the valuation of companies that don't have positive profits or revenues, and I wanted to start a proper debate.
each company/startup is a world of its own (the market, cost structure, growth drivers, capex needs, scalability, even investors play a key role). generalising on startup valuation methodologies is the wrong way to approach it. all i can say is that i've done quite a lot of number crunching on Groupon, and all valuations do not get past the $2bn market cap.
Good eye for catching that bit of nonsense. Someone commenting like they know what they're talking about. If potential investors valued Amazon based on its 'cash yield' at the time of its IPO who would have invested.
