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. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  8. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
  9. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  10. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center