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Coupons.com (NYSE: COUP ) soared an incredible 87.5% last Friday to make an exceptional IPO debut. Yet, the performance of this IPO would almost imply investors learned nothing from Groupon (NASDAQ: GRPN ) . Thus, despite this failed lesson, do Coupons.com and peer RetailMeNot (NASDAQ: SALE ) present shareholders with a good deal?
What's driving Coupons.com higher?
Coupons.com is in the business of taking coupons found in a Sunday newspaper and presenting them online. It services consumer package goods companies and retailers on its site, and generates revenue when a coupon is either downloaded from its site or used in a store.
Last year, the company grew its top line by 50% and was able to earn $168 million in revenue. For this performance, Coupons.com scheduled a $130 million IPO with a midpoint price of $13, thus implying a market capitalization of $945 million.
Instead, the company upped the IPO price to $16 and then closed at $30, giving it a market capitalization of $2.2 billion. Clearly, the market sees room to grow and is willing to take a big bet on Coupons.com.
Haven't we seen this before?
While not as hyped, Coupons.com is reminiscent of Groupon, another deal-based company's IPO from 2011. Groupon was one of the most anticipated IPOs of 2011, with 14 underwriters, and the stock price reached $30 for a 50% IPO pop, despite the company canceling much of its IPO roadshow and management dealing with a slew of questions regarding accounting practices.
Needless to say, Groupon had a lot of problems prior to its IPO, but investors were so fascinated with its daily deals and online couponing approach that they were apparently willing to forgive, forget, and value the company at nearly $20 billion. Now, we know those bets were unwise, as Groupon's current market cap sits at $5.7 billion and it has shifted focus away from online couponing in favor of e-commerce.
Groupon's online couponing business failed to produce consistent growth and was met with competing services from the likes of Google, Priceline.com, and even AT&T just to name a few. Still, Groupon was a large business at the time of its IPO, earning annual revenue of $1.6 billion, which gave it a price-to-sales ratio of more than 10 at its most expensive point.
Today, investors are paying a higher premium for Coupons.com (and the same premium for RetailMeNot) for a business that is not only smaller, but also faces significantly more competition versus Groupon at the time of its IPO.
Hard to be bullish long-term
Currently, the single greatest catalyst for Coupons.com is its growth, or at least its performance in 2013. However, in an interview on CNBC, Coupons.com CEO said, "We're much more interested in growing in a measured, conservative way year-over-year," in response to a question of whether or not 50% growth was sustainable; his response was quite vague.
Essentially, Coupons.com cannot guarantee sustained growth, nor can it fundamentally support its 13 times sales multiple. The primary reasons are that couponing is a business with very few barriers to entry, and history is against Coupons.com. There's also no social media element about the company's model.
With that said, RetailMeNot is Coupons.com's closest competitor, but rather than providing coupons on products such as laundry detergent or groceries, RetailMeNot offers customers deals at particular retail stores like Macy's, on brands like Hewlett-Packard, and at restaurants such as Ruby Tuesday. RetailMeNot offers a wide array of coupons not normally found in the Sunday morning paper, meaning its likelihood of longevity is greater than Coupons.com.
Furthermore, at 11 times sales, RetailMeNot is cheaper; it has higher gross margins at 94%, versus 69% for Coupons.com. Lastly, with 54% top-line growth last year, RetailMeNot fundamentally outperformed Coupons.com. Therefore, it you're seeking an investment in the highly fragmented couponing industry, Coupons.com is likely not your best bet, as RetailMeNot looks better.
Coupons.com might be a horrible investment deal, but RetailMeNot might not be much better either. However, Groupon is a different story. Groupon's daily deals business reported $401 million in fourth-quarter sales, which is nearly double RetailMeNot and Coupons.com's full-year. Plus, with $400 million, Groupon has finally begun to see a year-over-year decline in the business, but its e-commerce business is growing at a consistent 50% rate.
This e-commerce business could pay long-term dividends to shareholders, but the speed with which Groupon grew and then ran dry should worry investors of RetailMeNot and Coupons.com. The big question is at what point growth might become stagnant for Coupons.com and RetailMeNot, and at that point, will either company be able to innovate and create further investment value? Because these questions remain unanswered, and due to the valuation of Coupons.com, it clearly is not a good deal for shareholders.
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