Avolusis Journal

The Wall Street Journal reports that Groupon’s growth is insufficient to justify its current valuation.  Revenue has grown 18% in the fourth quarter, compared to the third, but this has been unable to overcome rising costs.  Operating profit still remains negligible because of its payroll of 11,471 — 1,000 of which were added in the fourth quarter alone. 

Further revenue guidance suggests growth could slow in the current quarter.  Another notable item: Groupon stopped telling investors how many people subscribe to their email list.  Now, if it we growing, why would they not tell?

Meanwhile Living Social isn’t fairing all that well either.  Their revenue was $245 million in 2011, far less than the $1.1 billion that Groupon reported.  And Living Social gives a far better payout of revenues to merchants — 67% compared to Groupon that pays out 41%.  (Basically it works like this — if a merchant sells 200 deals for $100 each on Groupon, then the merchant gets 41% or $8,200.  Now, since the deals are typically steep discounts from retail — say 60% or more, the merchant doesn’t make much at all.  So in the preceding example, a $100 deal is a discount to full retail of up to $250, of which the merchant gets $41 — an 84% discount!  And the main reason why many merchants do not repeat deals on Groupon and Living Social — the steep discounts don’t pay off in repeat customers.)

Finally, Living Social is operating at a loss of $400 million in 2011.

As for valuation… Living Social was valued at $4-$5 billion when it raised capital last December while Groupon is valued at $14 billion.  That equates to 9x sales for Groupon and 18x sales for Living Social.