I’m one of those cheap freaks who googles a coupon anytime I buy something online, so you can imagine how excited I was when I realized that RetailMeNot would soon go public.
RetailMeNot (SALE) is by far the leader in the online coupon category. The company lists coupons from tens of thousands of sites and retailers, which are redeemable online and in brick and mortar retail stores.
It’s also profitable — and investors will soon get the opportunity to own a slice of the dot-com company.
A Look at RetailMeNot
RetailMeNot claims more than 460 million visits to their online coupon sites in 2012, with its namesake site generating more than four-fifths of its revenue. Other sites for the UK, Germany, France, and the Netherlands are a small part of its business.
Of the 60,000 retailers for which it has coupons, it has relationships with 10,000. The company earns substantially all of its income from commissions. The S-1 states that 96.4% of its net revenue comes from commissions on sales from click-throughs on RetailMeNot’s many coupon pages.
In 2012, the company generated $144.7 million in revenue, and $25.9 million in net income. At a market value of $1.1 billion, the company would trade at roughly 40 times 2012 earnings. Growth helps explain the high valuation; RetailMeNot grew net income from $2.3 million in 2010 to $26 million in 2012.
It earned $7 million in the quarter ended March 31, 2013, for 11.9% year-over-year growth. Cyber Monday is its biggest day, with as much as 2% of all online sales flowing through RetailMeNot’s website on the biggest online shopping day of the year.
Bulls and Bears
Seeing as this is a relatively new company in a new space (the internet is still new by most standards), its future is difficult to predict. Let’s look at a few arguments from the bulls and bears to get a better understanding of the business.
What Bulls Would Say:
- RetailMeNot has a moat — The S-1 claims the business is protected by the network effect. As more people use the site, it can offer more coupons, many of which are user-submitted. Its rating system also allows for users to report dead coupons, so that they can be promptly deleted. Thus, RetailMeNot has some form of a moat, since it is built atop a community, which is difficult to replicate.
- It’s the best middleman — RetailMeNot is an effective gateway to online sales. When people search for coupons for a particular product or retailer, they often land on one of the company’s websites. Referring shoppers to businesses does not require warehouses, inventory, supply chain management, or any of the expensive logistical issues that come with a retail store. It’s an asset-light model that can expand rapidly without significant investments (it is just a website, after all). Plus, since they have clout in the online market, they can get perks like having the best payment gateway and cheaper hosting expenses.
- It is highly profitable per visit — RetailMeNot generated 31.1 cents in revenue and earned 5.6 cents per visitor in 2012. Few — if any — websites sustain $311 CPMs (revenue per 1000 visitors).
- Insiders aren’t cashing out — In a world full of cash out IPOs, I’m intrigued by insiders’ large stakes in the company. After the IPO, insiders will own 56% of the company, aligning their net worth with the interest of shareholders.
- Intangible assets have huge value — The company claims more than six million app downloads and nine million email subscribers, which can be used for consistent revenue generation.
What Bears Would Say:
- Anyone could do it — RetailMeNot could likely be replicated by other major online brands like AOL, Yahoo, or even Facebook as an a
dd-on to another product. Groupon could use its mailing list alone to replicate the business model.
- Its value may diminish — The company may make business more expensive for its partners. If a user navigates directly to an e-commerce site, proceeds to checkout, and only then searches for an online coupon, RetailMeNot collects a commission on a sale it didn’t actually refer. In the future, partners may crack down on such “referrals,” as they add nothing to the sales process.
- E-commerce may consolidate — As the internet matures, more market share is held in fewer hands. Google’s shopping ads plus eBay and Amazon’s marketplaces own a significant share of online advertising. As the industry becomes concentrated, commissions may drop precipitously as competition dwindles and shoppers pick their preferred retailer for repeat purchases.
- It is highly reliant on Google — Google drives much of its traffic. Luckily, RetailMeNot lists Google Ventures (Editor’s Note: Google Ventures changed to “GV”) as a shareholder, which may bode well for the coupon site’s future in online search engines. However, any site that generates a majority of traffic from a single source is riskier than a broadly-diversified website.
Where RetailMeNot Goes from Here
Of all the dot-coms that have gone public in the last few years, RetailMeNot is one of the most digestible. An equity market value of $1.1 billion (assuming preferred shares convert at the mid-point price of $21 per share) minus cash puts enterprise value at $1 billion.
The question is, can you build a better mousetrap (coupon site) for $1 billion? Or would an established player like Yahoo, Facebook, Yelp, or many others come to the table with $1 billion to take down the signature brand in online coupon sites?
For me, RetailMeNot is uninvestable. I fear that going public will show just how profitable online coupon sites really are, and stir competition from established players. However, I also realize that there is potential for a buyout by any one of the many cash-rich public tech companies looking for new growth markets. I have to admit, of all the tech IPOs in recent years, this one is very, very tempting.
What do you think? Are there big profits in coupons? Can anyone else build a better mousetrap?
A value investor and blogger who enjoys discovering the hidden gems available on the public markets.