Groupon’s August Gets Worse, as Analysts Call Valuation “Colossally Absurd”

Groupon is having a lousy August.

In one of the nicer reports to be published about the daily deals company in recent weeks, Benchmark Co. analyst Fred Moran told Reuters that he considers the company’s oft-cited valuation of $25 billion “very high.”

This morning Henry Blodget of Business Insider jumped into the fray, defending Groupon from the many slings and arrows it’s been taking by writing that the company “can make money – but it won’t be easy.”

It’s a nice try, and Groupon’s shareholders – who’ve been silenced (mostly) since it filed to go public on June 2 – undoubtedly appreciate it. But my sense is that things are going to get worse for the company, not better.

“‘Arrogant’ is probably the right word” for Groupon, says IPO analyst Scott Sweet, the principal researcher at IPO Boutique in Tampa, Fla. “There are a lot of negatives” in its numbers, “and I don’t see a whole lot of positives. At this point, I think Groupon will have a real tough time putting on a road show,” he says.

Sweet calls earlier projections that Groupon might be valued at up to $30 billion “colossally absurd. The retailer Target alone shows you how ridiculous that number is. Target [with a $35 billion market cap] has 60 times the revenue of Groupon. And you tell me if you think Target has fewer or more competitors than Groupon. You tell me who has more staying power.”

Criticism of Groupon has steadily grown since the company filed its S-1, a document that suggested the company’s business model is deteriorating in its oldest markets, as well as contained enough strange accounting metrics that the SEC asked the company to try again. (It submitted an amended S-1 on August 10.)

Yet Groupon’s newest filing has only sharpened concern over the company’s long-term prospects. The issue, as summarized in The Atlantic is that:

As of June 30, Groupon had $225 million in cash on hand, according to an amended S-1 the daily-deals website filed with the Securities and Exchange Commission. Sounds like a lot. The problem: The company still owed $392 million to merchants for Groupons that had already been sold and used up by its customers. While it’s assumed that the company could raise more capital on the private markets if it needs it, Groupon’s accounting sheets are trending in the wrong direction.

Groupon continues to bleed money, losing $103 million in the second quarter of this year alone. It’s famous for spending tens of millions on marketing and has to continue spending to keep up its rapid expansion into new markets and growth in existing ones. This has put the company into a sort of Catch-22: Groupon must spend to grow, but must continue growing to cover its operational expenditures.

Indeed, at this point, analysts believe the company is doomed to run out of money if it doesn’t go public. Sam Hamadeh, founder and CEO of the New York private company data provider PrivCo, specifically projects that absent a public offering or new capital infusion by private market investors, Groupon will run out of money in six months. “At that point, payroll checks will bounce.”

Groupon’s model simply doesn’t make sense, say the number crunchers. While the company’s early success was premised on customers spending an average of $15 per month — and being affordable to acquire — these days customers cost Groupon in the double-digit dollars to acquire, says Hamadeh, and they’re spending closer to $3 a month, with “every indication” that even that figure is declining, says Hamadeh. Partly, the drop owes to people no longer emailing their friends to secure a discount. Partly, customers are using some of the sundry other daily deals to hit their inboxes from other vendors these days. And partly, people now send Groupons straight to their spam box, having become fatigued by one too many offers. (That’s saying nothing of businesses that have grown weary of being approached by daily deals salespeople.)

Can the company really turn things around? It’s hard to see how. Then again, I’m someone who’s been skeptical of Groupon since April 2010, when Digital Sky Technologies led a $135 million Series C round that went mostly into the pockets of insiders. (Given that the company was less than two years old at the time, and that two of its cofounders – Eric Lefkofsky and Brad Keywell – were already well off, I questioned then –as now — what the rush was to cash out.)

For his part, says Sweet, “The longer [the company doesn’t go public], the worse it gets. The only person that seems to think that this deal is not in trouble is [its CEO] Andrew Mason.”