In the first few months of this year, I did show excitement for quite a few soon to be public companies. Some did turn private but most of the anticipated ones did not happen. Waiting for some has been frustrating (Facebook!!!) but I’m glad to get a chance to get more information on others (Groupon, Zynga, etc). We can all certainly understand why now is not the perfect time to go public but for some companies… that waiting time might end up much lower valuations. Today, I’d like to give some impressions on Groupon, the giant daily deal company and why its IPO is being delayed over and over.
-Context: No doubt about it, a world where at any point in time, Greece, Europe, US and international banks and perhaps much more could all blow up is ont the most friendly IPO environment. No one wants to go public in the middle of a recession or a market crash, it would mean selling out at the low point and looking like the loser. That being said, if this context is going to remain for several years, I’m not sure how companies like Groupon will be able to decide on timing.
-Founders Getting Out: I’ve never been a huge fan of trading on the basis of executives buying or selling stock. That being said, I think many including myself were surprised to see that most of the money raised in recent months by Groupon was not to fund growth and operations but rather to buy out some of the current founders and early employees. I can understanding them wanting the money but it does still raise questions: Do they think valuations have peaked? Are things as good as they might seem? Are they truly dedicated to Groupon in the long term?
-Accounting: Perhaps even more worrying is the fact that Groupon has had to revise its financial statements in a few different ways. First of all, Groupon was expensing its marketing over several years on the basis that the cost of acquiring new clients would pay off over that many years. That is a strange way of looking at it and they were forced to amend. Also, they were initially reporting the whole value of coupons sold as revenues instead of the portion that truly belongs to Groupon which was inflating revenues. They did eventually amend but it certainly raises a few questions. If so many obvious things were attempted in order to help Groupon look more profitable and as if it had more revenues than it truly did, what else was done? What kind of tactics are being used that could be difficult to find for most of us?
-Errors: As if things were not bad enough, Groupon managers have made a few errors. For example, I’ve heard no one think positively about Groupon’s Super Bowl ads, how much they spend and how unpopular it turned out to be. That could probably be attributed to a minor mistake by marketing. However, for Andrew Mason to break the “silence period” discussing the firms financials when he was not legally free to do so was a big mistake. To be fair, Google founders had made that same mistake over a decade ago. That does not make it any better though.
-Competition And Margins: One of Groupon’s big problems is that competitors can set shop with not much more than a couple of individuals and a couple thousand dollars. That has sparked competition from local players, niche players (such as Travelzoo for travel deals), but also huge companies like Google, Facebook and Yelp but also other international players like Amazon backed LivingSocial. Facebook and Yelp seem to be exiting the space because of the margins being so small and competition being so intense. That is certainly not a great sign for Groupon and might explain why the growth story is slowing down years earlier than expected.
Does This Mean Groupon Is Junk?
Of course not. Groupon refused a $6 billion offer from Google about 2 years ago and while it may not go public at its once discussed $20 billion valuation, it is still likely to go for an expensive price. Will I be a buyer? I would say unlikely at this point but like everything else in life, if the price is right:)
10 Ways To Stay Calm In These Crazy Markets
#1-Keep Some Perspective: You are trading with a 10, 20 years or even long horizon. There will be huge rallies and major setbacks, do not lose sight of how crazy things will get. A 15% rally in a few days can seem dramatic but in the context of a few decades, it is meaningless.
#2-You Do Not Need To Follow The Markets At All Times: It becomes tempting to follow each and every tick but what is the point really? If you follow it for entertainment purposes only, that can be useful. However if each down day creates additional stress, you might be better off staying a bit further away from the markets.
#3-Only Risk What You Can Afford To Lose: No, the markets will not decline by 75% overnight. However, if you are investing more than you can afford to lose, you are a fool. Markets do NOT always go up, they do go up on average over long periods of time. That means that as you become older, you should start relying much more on passive income and less on stocks moving higher.
#4-Reduce Debt: One of the primary causes of stress for both individuals and companies in tough economic times is debt management. It’s difficult to manage high debt payments when you suffer market shocks. I would say that over time, your debt to net worth should diminish gradually. Leverage is great and can always be used, but it should never be used in excess.
#5-A Worse Case Scenario: Honestly, you might think that you need $75,000 per year at retirement to live off of. But what if you decided to travel a bit less, move to smaller town or house, keep working a year or two? Not ideal scenarios of course but I’m just trying to say that it’s easy to make things look much scarier than they should. It does not need to be that way. If you do end up suffering unexpected losses in the market or lose your job, you can still recover without any issues.
#7-Hold Cash: If you can accumulate cash, it is ideal in difficult periods such as the current one. There will be plenty more as well. When you look at investors such as Warren Buffett, you get a pretty good idea of how great deals are available to those that have cash. You might not be able to call up bank CEO’s offering them your terms but you can buy real estate from desperate banks or sellers, you can buy distressed stocks or assets. All of those things are possible. They will likely decline after you buy, as timing the bottom would be nearly impossible. But if you expect to be up significantly 5 or 10 years from now, then you have a bargain.
#8-Read All Points Of Views: I’m telling you, it is very easy to find someone that believes the markets are going to zero and the end of the world is close. In fact, you could easily spend entire days reading all of the logical and well explained arguments behind that theory. In a similar way, I think it would be easy to find texts and commentary debating the exact opposite, that markets are undervalued, that a major rally will soon occur, etc. It’s important to be able to be critical towards all of those.
#9-Do Not Expect Governments To Do The Right Thing: You could probably think that governments will end up doing the right thing, that Europe can fix its Greek issue, that Obama and others can solve the fiscal deficits. I think we have seen too many examples of that not happening. The debt ceiling debate was one perfect example that did end up having massive consequences as all US creditors and rating agencies have issued serious concerns about the fact that the situation got this far. In the long run, that will result in higher interest rates and a weaker economy. No one had anything to gain by waiting so long. In a similar way, governments will be forced to revise some of the promises it made regarding pensions, benefits, taxes and services. Do not take anything for granted.
#10-Do Not Simplify The Debate: I don’t give any credibility to those that expect one or a couple of actions to be enough to reverse everything. Tax the wealthy? Sure, it will help raise more revenues, but at what cost and what will be the consequences. I’m not saying it shouldn’t be done, but all of these need to be done very carefully because it is truly not that simple.
How Do You Survive These Crazy, Volatile Markets?