Groupon's Valuation Raises Doubt

We all know Groupon as the website that offers heavy discounts on gift certificates, dining, and other activities around you locally. Providing services at typically half-off their regular price isn’t necessarily the best way to make money, and Groupon is starting to see that clearly.

Last Friday, Groupon revealed its latest earnings and said the company was worth approximately $11.4 billion. While that may seem like a pretty good number, keep in mind that just a few months ago, the company was valued around $30 billion. Rick Summer, a senior equity analyst at Morningstar, believes the new valuation is still too high and that the company should be worth around $5 billion. “Consider us skeptical,” Mr. Summer said. “The company has not been able to achieve profitability, as expense growth continues to outpace revenue gains.” He expects Groupon not to turn a profit until 2013.

Groupon has continued to lose money, quarter after quarter. Last year, the company lost $101.2 million in the second quarter alone. Things slightly improved when the company only lost $10.6 million in the following third quarter. This is mainly in part due to Groupon reducing its budget in the American market by slashing its marketing and advertising departments. In fact, the company is close to breaking even in North America. It’s the foreign markets that are operating at a loss.

Still, analysts saw a decrease in revenue when Groupon reduced its marketing and advertising budgets. Revenue only rose by 10 percent, whereas it previously rose by 33 percent the quarter before and a whopping 72 percent the quarter before that. It would make sense, given that Groupon has spent less time and money on promotions, that its revenue has not seen such a great increase.

The implications of Groupon’s continued spirally into losses could be that the company is forced to shut its doors or, in the least, reduce its costs by offering less deals, etc. Groupon is still a baby company in that it hasn’t been around for a long time. It’s only about three years old so there is still plenty of time to work out all the kinks and have the company turning a profit. According to Tom Taulli, a writer for InvestorPlace, “Groupon’s revenues have gone from $3.3 million in the second quarter of 2009 to $644.7 million in the first quarter of 2011.” While they’re still not in the black yet, they’re clearly doing something right to get such a dramatic increase in revenue.

Groupon is about to go public and offer stock shares at around $16 and $18 per share, offering only five percent of the company’s total stock. They expect to raise around $800 million from initial trading, which begins on November 4^th.

I believe that Groupon will eventually turn a profit and become successful. The public no doubt loves Groupon and the cheap discounts they offer so the demand will always be there. They’re still young and I think now would be the best time to invest in the company. How many times have we seen small companies boom and then become mega corporations? Amazon and Apple, anyone? It’s a gamble nonetheless but should Groupon continue to increase revenue at the rate it’s been doing, early investors should be pleased at where things are headed.

Sources:

http://dealbook.nytimes.com/2011/10/24/groupons-latest-value-raises-doubt/

http://www.investorplace.com/ipo-playbook/groupon-grpn-stock-ipo-2011-offering/

Facebook releases highly anticipated iPad app, only to find it riddled with bugs

Nearly 18 months after the first iPad was released by Apple, Facebook has finally launched an official app for the popular tablet. Until now, iPad users have only been able to access Facebook through the smaller iPhone app, its official webpage, or a third party app. Unfortunately for an app that has taken so long to create, users are already complaining of bugs that make navigating the app nearly impossible.

Consumers have been wondering why it has taken Facebook so long to release an official version of their iPhone app for iPad when other companies have released updated versions of their apps at a much quicker pace. Facebook has remained quiet of the matter. "We're releasing it now because it's done," said Bret Taylor, the firm's chief technology officer. Supposedly it was Facebook who delayed releasing the app, even though it was rumored to be complete months ago. Why the company would do this is unknown to anyone.

Facebook’s problems didn’t end with the release of the app as consumers are complaining that there are plenty of bugs with the thing and that it’s barely functional. For something that has taken so long to make, one would think it would be bug-free. People have been voicing their opinion on social media sites like Twitter and even Facebook itself. "I have an Apple dock/keyboard, and if you put the iPad on the dock then try to comment on a post, the 'Send' button doesn't appear," Journalist Mark Coyle said. "Take it off the dock - it appears. Poor testing by FB."

While it’s normal for things like this to have bugs in their initial release, Facebook’s handling of the problem doesn’t sit well with consumers. I believe they need to be more upfront with their users and let them know what’s going on. They should explain why there were delays and why there are so many bugs rather than avoiding the questions with their obvious “it’s done when it’s done” responses. It definitely doesn’t put the company in a good light. Hopefully they can work out all of the kinks with the iPad app and that they’ve learned a valuable lesson for future business practices.

Netflix separates streaming and DVD services by announcing Qwikster

The popular DVD rental and internet streaming service Netflix has announced that it will split itself into two separately operated businesses. Netflix will continue to stream movies and television shows through its website while its new Qwikster website will operate the DVD rental side of things. Users who currently receive DVDs by mail will have to register a new account with Qwikster, which will cost $7.99 for basic service. Basically subscribers will have to manage two separate sites independently if they want both streaming and DVDs by mail. This news comes shortly after the company announced that prices would be increasing for those who purchase both streaming and DVD services. In addition, the new Qwikster service will be adding video games to its inventory of rental DVDs to try to attract a larger audience.

Netflix CEO Reed Hastings took to his official blog on Sunday to speak directly with customers and apologize for the way in which the company has handled its price increase announcement and backed up his decision to split Netflix into two separate entities, saying that by splitting the service, “we will be better at streaming, and we will be better at DVD by mail.” Hopefully this will end up being better for the consumer.

Not everyone agrees with him, however. Wedbush Securities analyst Michael Pachter says, "These guys did three things bad. They raised prices. They offered lower-quality content, and they made it more complicated." Consumers apparently agree with him as stock prices for Netflix dropped more than seven percent on Monday. The company has also lost nearly one million subscribers since they announced the changing of prices. With the announcement of the split, no doubt more subscribers will follow suit in dropping the service. This gives other rental companies such as Redbox a chance to take some consumers away from them and increase their market share. Over the past few years, Netflix has been the king of rental services and has rarely made a misstep. With this two announcements comes uncertainty about the company’s future.

Personally, I think it’s an alright decision. I am currently a streaming-only subscriber to Netflix and have had no intention to get DVDs by mail so I have been unaffected by both recent announcements. If this split makes the streaming services better in the long run, then I welcome it. I’m also a gamer, so having the option to rent from Qwikster in the future is enticing as well. DVDs are a dying breed as more and more people move on to Blu-ray and digital media. By splitting the service, Netflix can focus on the more important of the two and put most of its resources to bettering the streaming services, even if they don’t want to blatantly admit it.