Over the past couple of weeks, unconfirmed chatter by popular media has brought up the possibility of Google acquiring Groupon, a company offering a daily deal on products, activities, and experiences in about 250 cities across the US, Canada, and Europe. Neither company has officially confirmed the discussions but such a deal would make lots of sense for Google, in our view. We believe the local ad market is $100bn+ a year in the US ($200bn+ globally) and so far no one has cracked the code to bringing this online but Groupon has the most compelling model.
Groupon is also the fastest company approaching $1bn in revenue in the history of the Internet, as per our estimates, and has close to 40k merchants waiting to get listed for which Google can achieve a much wider distribution with its 700mm global monthly unique visitors. We also believe that many of Google's 1.2mm advertisers (esp. in the long-tail) would benefit from a Groupon type of offering which Google can cross-sell to them.
In our view, acquiring a high-growth opportunity is the right use of Google's $30bn in cash.
We have heard various unconfirmed valuation estimates reaching up to $6bn which does not sound expensive to us given that by our crude estimates Groupon can reach sales of $1.0-$1.2bn next year (giving implied valuation of about 5x-6x Price to Sales). We reiterate our 1/Buy and $700 PT.
Key Points
Why Groupon?
There are several sound reasons for an acquisition of Groupon by Google. First, we believe that local advertising is $100bn+ a year in the US and in excess of $200bn globally (with less than 10% online). So far, no one has cracked the code to bring all local merchants online but Groupon has the most compelling model, in our view. Second, Groupon is also the fastest company approaching $1bn in revenue in the history of the Internet. This would give Google another $1bn business opportunity outside of core search.
Third, Groupon has close to 40k merchants waiting to get listed for which Google can achieve a much wider distribution with its 700mm global monthly unique visitors. Finally, Google serves about 1.2mm advertisers of which 40% are long-tail, we believe, and which could benefit a lot from a Groupon type of offering which Google can cross-sell to them.
About Groupon
Groupon was launched in November 2008 and features a daily deal (offering 40% to 90% discount) on the best things to do, see, eat, and buy in about 250 cities across the US, Canada, and Europe. The company is headquartered in Chicago, IL with a growing office in Palo Alto, CA and local account executives in many cities. Its staff has grown to about 3,000 in 2 years (perhaps about half of this through acquisitions). The company has more than 3mm subscribers and works
with close to 40k partner merchants, trying to expand the number of daily deals in most cities.
Groupon completed its Series C financing round in April 2010. The company raised $135mm from Accel Partners, Battery Ventures, Digital Sky Technologies, and NEA. Previous rounds include $30mm from Accel Partners and NEA in December 2009, $4.8mm from NEA in January 2008, and angel funding from Eric Lefkofsky and Brad Keywell. Groupon is expected to exceed $500mm in revenue in 2010.
