A new decade, another stock bubble

We’re on the edge of a new stock bubble. First we get good IPOs (LinkedIn and Facebook in the near future) with reasonable growth and profits, then the quality goes south as investors pile in to ever shittier prospects.

And here comes the head of the crud IPO wave: Groupon

Groupon is running out of cash because a) although its growth in revenue is crazy high, its growth in overheads are even higher and b) its founders are stealthily cashing out using venture capitalists money and the forthcoming IPO.

See here: http://tech.fortune.cnn.com/2011/06/06/does-mason-want-to-get-out-of-groupon/

Groupon is losing money by choice. In early 2010, the company was profitable, then it embarked on its aggressive expansion to stay ahead of competitors. Hypergrowth is expensive. Thanks to sales and marketing costs, Groupon is spending money even faster than the insane pace that it has been bringing it in. This approach, not uncommon in startups, is risky: It works if all that spending keeps revenue growing over time. But there are already worrying signs that might not be the case; according to Groupon’s own data, it’s already seeing diminishing returns on its investments in established cities like Boston.

This leaves Groupon in a fairly precarious financial position. Total liabilities are $534 million, only $7 million less than total assets. It may be premature to declare that Groupon is “effectively insolvent,” as some commentators have, but companies hoping to go public normally wait until income statements and balance sheets are in a healthier state. There is something rushed about this IPO, as if the company is acting in desperation. Desperation is never the mark of an attractive IPO.

Groupon is burning through cash so quickly that, without new financing, it will run dry come autumn. But again, the company chose to put itself in this position. The company raised $950 million in January, but 85 cents of every dollar went toward stock repurchases for Mason and other insiders. (In 2009, Groupon gave Mason a loan to buy some shares, which he repaid only in part.)

One of the founders has a lot of “previous” in this sort of thing: http://tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/

The strategy is clearly to pump up the growth and revenue at the expense of profitability, but like Amazon.com, anybody holding this stock for any length of time will risk losing nearly all of it when the laws of economic gravity reassert themselves.

Groupon is nearly insolvent and is issuing shares that values it at $30 billion, greater than Google’s IPO value . The shares are non-voting.

If there’s an IPO where the all of the risk is to be born by the ordinary investor and not at all by the founders or by the IPO underwriters [Morgan Stanley (MS), Goldman Sachs (GS) and Credit Suisse (CS), its like its 1999 all over again] then its this one.

If CNBC had any credibility it would run a story: “Groupon – run away screaming”. But I’m not expecting any credibility.

I’m watching Yet Another Tech Stock Bubble, this time in social networks. I wish I had the money to buy Put options on companies like this. I’d be sure to make a fortune from investors whose memory spans are shorter than Leonard Shelby

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