Groupon: perfectly healthy, good cash flow, and well on the track

Groupon

• Spent $263 million in 2010 and $208 million in Q1 2011 for marketing. Source: Groupon’s S-1 IPO Filing to SEC


• Spent $203 million in 2010 for acquisitions


• To generate net loss of $413 million in 2010 and $113 million in 2011

It can be profitable TODAY if it decides to

1. Cut down marketing activities and rely on word-of-mouth


2. Stop international expansion


3. Net income would immediately be approximately $381 million, EPS $1.63

However, the scenario is purely hypothetical because international business is already larger than its NA revenue.

Additionally, cash flow looks good

• $7 million free cash flow


• $209 million in cash


• $82 million in accounts receivable while trade credit is $519 million, or 6 times receivables

In terms of numbers, the current cash flow statement is perfectly healthy.

What’s worth the discussion is innovation in business model to generate supreme profits and create barriers to entry.

A technical note: my sensitivity analysis points out the factor that affects valuation the most is market performance.

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