Investors are salivating over the upcoming initial public offering (IPO) of Groupon (Nasdaq:GRPN), as visions of sugarplums start dancing in their heads. For those investors that are still in a rational state of mind, here are three items about Groupon that might surprise you. (For more on what others like Groupon are worth, check out What Are Social Media Sites Really Worth?)

TUTORIAL: IPO Basics

Generally Accepted, but Not by Groupon
Although Groupon says in its prospectus that the company doesn't measure itself in conventional ways and uses irreverent humor to distinguish itself from other public companies, in reality, Groupon is no different than others as it touts a non GAAP measure as a financial performance metric.

Groupon uses adjusted consolidated segment operating income as one of its primary financial benchmarks, which the company describes as "operating profitability before marketing costs incurred for long term growth." This measure conveniently excludes the cost to acquire new subscribers.

Groupon justifies the use of this metric with the claim that the expenses are necessary for long term growth, and that company is willing to sacrifice short term profitability to set up for this growth. While this may be true, the expenses are real and the attempt to manipulate the focus of investors onto this measure proves that Groupon is just another conventional public company.

One of my favorite non GAAP measures was one used by Martin Marietta Materials (NYSE:MLM) in late 2010. The company reported "incremental operating margin excluding freight and delivery revenues for the aggregates business for the months of October and November 2010 and the impact of increased energy costs on the incremental operating margin excluding freight and delivery revenues." Companies requesting special metrics usually have a reason for it - and not necessarily a reason that matches investor's interests. (For more on Groupon IPO, check out Groupon Moves Towards Likely IPO.)

The Payables Secret
Groupon has a favorable merchant payment structure embedded in its business model as it charges customers up front for purchasing a coupon and then delays paying the merchant for up to sixty days. The company has an even better payment structure in its international operations under the redemption payment model where the company doesn't pay merchants until a coupon is actually redeemed.

These payment structures will lead to a negative cash conversion cycle for Groupon as it collects funds from its customers long before it has to pay any to its merchants. This is a major positive for the company's cash flow and working capital.

Another public company with this advantage is Dell Computer (Nasdaq:DELL), which reported a negative cash conversion cycle of 33 days in the quarter ending January 2011. For that matter, Amazon (Nasdaq:AMZN) also reported a negative cash conversion cycle of 21 days in the most recent quarter.

One issue that investors need to consider is whether Groupon will be able to retain the benefits of this negative cash conversion cycle over time as it grows. It's one thing to pay a small retailer late, but try telling Wal-Mart (NYSE:WMT) or Home Depot (NYSE:HD) that they won't get paid for 60 days and things might get ugly pretty quickly. (To learn more about their cashflows, check out Understanding The Cash Conversion Cycle.)

Selling Everything but Control
Like many internet entrepreneurs, the founders of Groupon want to monetize their ownership stakes through a public offering while still controlling the company. This is being accomplished through a dual share structure that concentrates voting rights in one of the classes held mostly by insiders.

This dual structure is in place at other public companies including Google (Nasdaq:GOOG) and LinkedIn (Nasdaq:LNKD), and even at traditional media companies like the New York Times (NYSE:NYT) and the Washington Post (NYSE:WPO). This dual structure also confirms that Groupon just might be more conventional than it thinks.

Bottom Line
The upcoming IPO of Groupon will no doubt make the founders of the company and some lucky investors very rich, but there are some things in the prospectus that might come as a surprise. (To help you in determining value, read Social Media Companies - How Big Are They?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  2. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  3. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  4. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  6. Investing Basics

    Explaining Trade Liberalization

    Trade liberalization is the process of removing or reducing obstacles that impede the exchange of goods and services between nations.
  7. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  5. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!