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Here comes the wall

9 February 2012 By Robert Cyran

Groupon’s growth spurt is nearing its end. The newly-public online U.S. coupon firm increased sales five-fold in 2011 and even turned slightly profitable. But its first results since the initial public offering last November, announced on Wednesday after markets closed, also show revenue growth slowed for a fifth consecutive quarter. Groupon will have to get a move-on to justify its $15 billion valuation.

While any company would be happy to have Groupon’s revenue improvement over the past year, no firm can grow at such a clip for an extended period. At such rates it would rack up $5 trillion in sales by 2016. That isn’t going to happen. Unfortunately for Groupon, it looks like its days of fast growth are coming to a close.

The firm thinks next quarter’s sales will rise no more than 9 percent compared to the one that just ended. That might be the company setting a relatively low bar. But consider this: the firm grew 72 percent from the fourth quarter of 2010 to the first quarter of 2011. So the rate of expansion is slowing, and quickly.

As a consequence, Groupon’s future must revolve around earnings. The news isn’t great there either. Sure, its operations are now turning over a slight profit, which should increase as foreign operations mature. But the company has yet to show much operational leverage, or the ability to squeeze more profit from every incremental dollar of revenue.

Moreover, Groupon has scaled back marketing and other investment to improve its margins. Whether this reduced spending is enough to sustain the business against fierce competition from the likes of LivingSocial is a good question.

So far, it appears Groupon must choose between fast growth and huge losses or little growth and a small profit. Unless it can show increasing sales as well as an ability to grow the bottom line, investors are bound to lose patience.

 

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