Is Living Social The Next IPO Disaster?

By Karen Rogers - August 23, 2012 | Tickers: AMZN, ANGI, FB, GRPN | 0 Comments

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Living Social announced last month that they had tapped JPMorgan, Bank of America and Deutsche Bank to underwrite their IPO.  The company hopes to raise $1 billion from their stock offering, which would peg Living Social’s valuation between $10 billion and $15 billion dollars.

So what does Living Social do?

The online company offers money saving vouchers for goods and services (“deals”) from select merchants to its members, putting Living Social in direct competition with Groupon (NASDAQ: GRPN).  New users can sign up for free on the Living Social website and browse deals which are advertised as being up to 90% off the normal price.  Users can select and purchase a promotional deal voucher online that must be used by a certain deadline.  Living Social makes money by splitting the deal voucher price with the merchant.  But Living Social merchants had better be prepared to cut their normal prices anywhere from 50% to 90%.   For example, a business offering 50% off the cost of a $100 meal would sell the deal for $50.00.  But after paying Living Social their 50% commission fee, the merchant would make a whole $25.00, which may or may not even cover their costs.

Living Social isn’t the only company that’s pinned their revenue hopes to customer subscribers.  Groupon, Angie’s List (NASDAQ: ANGI) and Facebook (NASDAQ: FB) also adopted this business model and before Living Social rushes head-long into an ill-fated IPO launch, might want to take a look at how their predecessors have fared. 

Living Social claims to have 34 million users in the U.S. and an additional12 million users overseas, but, as Facebook discovered, millions of members don't necessarily translate into millions of operating profit dollars.  According to Amazon’s financial footnotes, last quarter Living Social posted revenue of $138 million and in the 1^st quarter 2012 it made $110 million.  But the company also posted a last quarter operating loss of $96 million, an increase from their $92 million operating loss in 1^st quarter 2012. 

Why is Living Social numbers part of Amazon’s financial footnotes?  Amazon is a major investor and has invested $175 million in Living Social.  But being linked with this internet giant hasn’t been enough for Living Social to shake their ongoing quarterly operating losses.

If the past is an omen of the future, then a Living Social IPO stock investment could be a major financial mistake. Living Social has substantial operating losses and has quietly started restructuring the company through employee firings.  Until the company can provide substantial answers as to how they’ll creating a steady, reliable revenue and control their losses to produce the financial results investors demand, Living Social stock might turn out to be an excellent company to short.

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