What has explosive revenue growth but massive losses on its books, even more expenses forecasted for the foreseeable future, a highly competitive business model but will still probably rake in a ton of cash, at least at the outset? Why, it’s a tech IPO, of course, in this case Groupon. As always, no investment advice here, folks, just me being my usual contrarian self…

In case you’ve been living under a rock, Groupon offers daily deals in almost all major markets for a % off various goods and services provided by vendors in markets with high competition and low barriers to entry: salons, medical spas, restaurants, etc. Typical deals are “$10 for $25 at Bob’s Restaurant” or “90% Off Laser Hair Removal” type stuff.

And supposing you buy that Bob’s deal, Groupon keeps half, or $5, and then a few weeks after the deal runs on the site, Groupon cuts Bob a check for the other $5. So Bob is essentially giving you a meal for $5, which probably doesn’t cover his costs, but he can justify it as a marketing expense, because you’ll be back… right? Based on my extensive interrogations of every Groupon user I know, it’s pretty unlikely you’ll be back unless you were already a regular there, as your next meal will probably be at Chuck’s down the street, when Chuck offers a $10 for $25 Groupon. (This is the kind of deal that is really only going to work for operations like events that are not even close to selling out – if you’re performing a play in a 1,000 seat theater and it’s two weeks off and you’ve only sold 175 tickets, by all means try some kind of discounting to fill the rest of the seats, and if anyone comes back for another performance that’s gravy. Unfortunately, this application is much more limited than preying on small business owners convinced that all they need to do is get people in the door in order to win thousands of converts to their particular Botox salon.)

So… yeah, $750 million IPO based on that. And why not let’s take a look at their prospectus for s**ts and giggles? A few fun numbers:

Net income from selling Groupons: $279 million
Net losses in 2010: $456 million

Amount spent on acquisitions: $203 million
Advertising costs: $263 million (Those ubiquitous and irrelevant Google banner ads don’t come cheap, people)
Costs of overhead: $233 million (salaries etc)

They claim much of these are one-time expenses. But if they don’t continue to acquire competitors or advertise… how will they keep growing? Magic, I suppose, because here are some of the risk factors they cite in the prospectus that suggest that growth and engagement will be challenging (and thus, one can infer, expensive):

- we have experienced rapid growth over a short period in a new market we have created and we do not know whether this market will continue to develop or whether it can be maintained;
- our business is highly competitive and competition presents an ongoing threat to the success of our business;
- if we fail to retain our existing subscribers or acquire new subscribers, our revenue and business will be harmed;
- if we fail to retain existing merchants or add new merchants, our revenue and business will be harmed;

Eh, I guess it’s no big deal, as long as they keep sending everyone emails written in “Groupon Voice” that tell us “This full-body-waxing deal will leave you hairless, like one of them cats” we’ll all stay engaged and tell all our friends.

So okay, it’s bleeding money, but to be fair it’s not all garbage. What real asset do they have? A huge email list (some 83.1 million, per the prospectus – and since they acquired almost all of them in 2010 by buying competitors/advertising, this gives me a CPA of about $5.61 per email – daaaamn), and some demographic data. A database of millions of people who want to buy things, I suppose, does have its value, but it’s also a database of people who want to buy things cheap. I noticed this morning that they also appear to have a partnership with Expedia to send out travel deals, but it is a LONG leap from dropping $10 for $20 in burritos to dropping $5K on a “$10K value” cruise leaving out of Reykjavik. So, good luck with that.

I’d also be remiss if I didn’t mention what they did with the last money they raised (which is, they gave it to previous investors even though they’re bleeding cash):

Most concerning of all, however, might be how their most recent capital raises have been handled. Their Series F and G capital raises, which occurred in April and December of 2010, raised a combined $1.08 billion. Of that $1.08 billion, $150 million went to the company for working capital purposes. The other $930 million? Paid back to founders and early backers by buying their shares from them.

So a company that owes $230 million more than it has, and appears to be burning through $100 million or more a quarter, is using money raised from later investors to pay back early investors…

I couldn’t get a quote from Triumph The Insult Comic Dog for this post but I think it might be because he’s busy composing an email of his own for an up-and-coming pet deal site. I got a look at the subject line and I think it said “$0.19 for $11 in Pets.com Stock.”

For nostalgia’s sake, anyone remember the pets.com vs Triumph lawsuit? –