"Conventional Valuation Models Don't Apply to Us"

I recall, back in the days of the first Internet bubble, how the popular wisdom was that there was incredible value in "eyeballs" - the volume of traffic to your site, and information you might glean from your users, was far more important than turning a profit... or even generating revenue. As it turns out, although there have been innovations in how traffic and information can be monetized, it is important to generate that revenue.

I commented recently (and cynically) on the LinkedIn IPO, taking the position that the argument that the bankers put one over on LinkedIn's owners was a stretch. It seemed, and still seems, more symbiotic. LinkedIn, its owners and the investment bankers who handled the IPO made tons of money. Whether or not LinkedIn ever generates enough revenue to justify a tenth of its present valuation, its owners and early investors will walk away with truck loads of money. Meanwhile, the businesses of the nation's proverbial "Main Streets" have difficulty obtaining financing. Wow. There's less risk in floating a multi-billion dollar IPO for a business that has no clear plan or path to justify its valuation, than in investing in traditional brick and mortar businesses. There must be, because you can see for yourself what banks are doing.

Groupon plans to be the next business to clean up through an IPO:

The IPO, which could value Groupon at $15 billion to $20 billion, prompted Richard Brenner, president and CEO of financial-advisory firm The Brenner Group, to say that he would tell would-be investors to “sit out” the IPO because Groupon “doesn’t appear to have a sustainable business model yet.”

“Why would the public support a company that can’t figure out how to be profitable?” Brenner said.

But Mark Lehmann, a Wilmette native who heads up JMP Securities in San Francisco, said investors are clamoring for a long-awaited IPO by a company that shows such terrific growth.

“Groupon has the brand and the first-mover advantage, and it is extremely well-regarded,” Lehmann said.

Groupon came into business with a simple but clever idea, and its latest efforts suggest that it is capable of innovation. But this type of thing makes me nervous:

We don’t measure ourselves in conventional ways.

There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we’re creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth.

A more sophisticated explanation, certainly, but why does the phrase, "We make it up on volume" come to mind?