Coupon.com's IPO: This deal deserves a clipping
Ain't no one player that could beat this lunacy. / Ain't no hustler on the street could do a whole community. -The CoupWhat to make of an Internet IPO, the second of the year in the consumer-Web space, that nearly doubles from its offering price on its first day of trading? That has the ominous ticker COUP and a name that rhymes with Groupon? That, like Groupon, went public with a business plan to remake an old retail model, with fast-growing revenue and with nary a cent in profit?
What, in other words, to make of Coupons.com's successful IPO? Is it a new take on the old Groupon, the startup that burned through so much cash to finance hasty growth it plummeted from its initial post-IPO highs? Or the new Groupon, the one that finally found traction by shifting away from daily deals and toward a mobile-centric deal database? Is this a powerful new player in the Internet sector? Or are invstors buying the stock above $30 a share being played?
There is ample evidence for both bulls and bears. Coupons.com has seen its revenue growth rate accelerate from 23 percent in 2012 to 50 percent last year. Yet it has an aggregate operating loss of $92 million over the past three years. Yet that operating loss has fallen to 6 percent of revenue last year from 53 percent in 2012.
Coupons.com is cutting operating costs while seeing revenue rise. So looking at its income statement alone, one could easily foresee a move into the black in coming quarters. But it's a whole different story when it comes to valuation: While Coupons.com may have started out the day as a defensible (at best) investment, it ended as one more precariously priced tech IPO.
In January, Coupons.com filed to raise $100 million, later upping its take to $130 million in an offering priced between $12 a share and $14 a share. Late Thursday, the company raised that offering price again to $16 a share, allowing it to raise $152 million. When the stock opened Friday, it began trading at $27.15 a share and rose as high as $32,90, more than double what investors paid for it in the IPO.
At the end of the day, shares settled at $30 a share, giving Coupons.com a market cap of $2.2 billion. That values the stock at 13 times its revenue last year. Even if Coupons.com's revenue grows by another 50 percent this year, the stock at this price would still have a price-to-sales ratio of 9. Groupon's stock is trading at 2.3 times its 2013 revenue and 1.8 times its estimated 2014 revenue.
In other words, Coupons.com's stock is worth a third of Groupon's value, with one-fifteenth of its revenue. But in this market, there is reason to believe plenty of investors are willing to keep buying even at its current price. RetailMeNot, another digital-coupon service, went public last July and has a market cap ($2.3 billion) similar to Coupons.com as well as a price-sales ratio (10.9) that is comparable if slightly less ethereal.
RetailMeNot (trading under the ticker SALE – perhaps another encoded message to investors) at least has posted a profit, but the price is trading at 190 times its recent earnings. The company saw revenue grow at a Coupons.com-like 45-percent rate. But neither company can be expected to post enough earnings to justify their current valuations for a few years. And it's not clear that the digital-coupon market will predictably evolve in a way to allow both companies to see dramatic profit growth.
What's more likely to be happening is that demand for consumer-tech IPOs is high but the supply is low for now. Well-known brands like Airbnb, Dropbox, Pinterest and others are expected to enter the market. When they do, some of the demand for young, Twitter-like IPOs will flow into them. We saw something like that late last week: RetailMeNot fell 11 percent as another digital-coupon IPO approached the public market.
The next consumer-tech name to test the IPO market will likely be GrubHub, which filed its prospectus a week ago. It will be an interesting test case. GrubHub lacks the cachet of Twitter or Pinterest – it has its loyal users, although many people have forgotten they ever downloaded the app.
Nevertheless, GrubHub's income statement is impressive. Revenue grew 67 percent to $137 million last year, while operating profit grew 71 percent to $14.9 million. (Net profit declined, mostly because of a tenfold increase in income taxes.) Operating cash flow and cash on hand both increased in 2013.
GrubHub will have a smooth IPO, but if it doesn't see a huge first-day pop to the irrational valuation that Coupons.com and RetailMeNot are seeing, it will suggest that investors are more interested in the speculation of risky plays than in clamoring for well-run companies with strong operations. And if that's the case, small investors buying high-valuation stocks as they list on the market could find themselves on the wrong end of a hustle.
(Image coutesy of Ooingle.com)