We've written before that we think group-buying site Groupon is huge, even cheap at $1.2 billion.
TechCrunch writes that Groupon's estimated 2010 "revenue" is $350 million and that it makes "$1 million or more per week in pure profit".
We've heard every number for Groupon 2010 revenues, from $100 million to $300 million.
In valuing the business as cheap at $1.2 billion, we picked the conservative $100 million number. Outside of the fact that putting some numbers on a per-week basis and some on a per-year basis doesn't make understanding the business easy, the problem with estimating the size of Groupon's business is the difference between actual revenues and "gross merchandise sales."
What's the difference?
Groupon partners with local businesses and sends them customers. So when you buy a deal on Groupon, the majority of that money goes to the partner business, not to Groupon (or rather, not for long). All the money that flows through Groupon should be called "gross merchandise sales." But Groupon needs to meet and exceed its costs to generate profits not from gross merchandise sales, but from the cut it takes.
Is the $350 million per year gross merchandise sales or revenue?
What's more, "$1 million per week" (let's round that to $50 million/year to avoid headaches) in "pure profit" sounds great, but "pure profit" is a concept with no meaning.
Is that net profits? Is that free cash flow? Is that EBITDA (earnings before interest, taxes, depreciation and amortization)?
Now, we've also heard that because Groupon is so popular, it can afford to take a huge cut of the money that goes to partner businesses, even after providing steep discounts. We heard the cut is as high as 30%.
If the average cut is 30%, that would explain a lot. The $350 million number could be gross merchandise sales and the $100 million number could be revenues. But that would make the $50 million "pure profit" number very unlikely, if that denotes net profits.
50% net profits for a discount site? Seriously? If that denotes free cash flow or EBITDA, we can talk.
Or we could work our way up from the $50 million/year figure. If that denotes net profits and the $350 million/year figure does denote revenue, that would give the business a net profit margin of roughly 14%, which is still very high for a young discount business but a lot more believable. Using the 30% cut figure, that would put gross merchandise sales around $1 billion.
If we had to guess between those two, we would say the $350 million number is gross merchandise sales and $100 million is actual revenue. Our instincts tell us if Groupon had hit a $1 billion run-rate in gross merchandise sales already, that press release would've already hit our desk eleven times.
From that we would guess the $50 million "pure profit" number is actually EBITDA, which is nothing like "pure profit," but 50% EBITDA margins would still be very good for pretty much any business, especially a discount site. Or the number was made up.
What's more, a $1.2 (the number now appears to be $1.35) billion valuation for $350 million in revenues would be extremely cheap, 3X revenues compared to roughly 10X revenues for Facebook and Zynga, in which Digital Sky Technologies also led the round.
But who knows!
So, as you can see: this is all pretty hazy. We're still very bullish on Groupon and think its valuation was justified at whatever end of the spectrum its financials are, given the market and the brand. But its financial picture is still very hazy.
Who has details? Let us know!
This may be a more profitable model for local media's attempts at local search. This can be particularly valuable for local media companies with sizable email databases (Groupon sends out daily emails to generate sales). Click on any of the links in this story. The comments on the original articles have some good math analysis.