At long last, Groupon has filed to go public, but the website’s financial statements have proven particularly disconcerting. Groupon has sustained significant losses and shows no sign of returning in the black anytime soon. Although after the internet giant Amazon (NASDAQ:AMZN) went public, the company lost money for six years. As history shows, upfront losses alone should not cause significant concern. However, investors should be wary of the dividends Groupon is awarding on preferred stock.
While preferred stockholders are among the first individuals rewarded when companies do well, Groupon’s performance thus far has hardly warranted the significant dividends these individuals have received. In total, Groupon has paid out $930 million to employees and investors. Equally alarming, in spite of losing $390 million from operations in 2010, Groupon spent $52.9 million buying preferred shares. The obvious question raised by all this is why preferred shareholders seem to be squeezing as much out of the company during these preliminary stages.
In general, the preferred stockholders are the founders of Groupon themselves along with the venture capital investors that helped get the website off the ground. It is a rarity for such individuals to receive substantial dividends while a company is still developing, much less losing money. Perhaps the rush to profit is indicative of uncertainty with regards to the long-term viability of the company. In any case, investors jumping on the bandwagon should be wary, since they will never be as well-informed as the founders and managers reaping the benefits of their preferred shares.