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?)


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. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  3. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  4. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  5. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  6. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  7. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  8. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  9. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  10. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  1. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. 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 >>
  6. 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 >>

You May Also Like

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!