Groupon’s stock slide weighs on rival LivingSocial

Correction: An earlier version of this story incorrectly identified the Benchmark Company. This version has been corrected.

August 26, 2012

Concern among investors that the once-booming daily deals business has cooled are playing out in the market, with the stock price for industry leader Groupon continuing to slide last week.

Though District-based LivingSocial has faced less scrutiny as a private company, analysts say that Groupon’s woes have a direct impact on perceptions of the company’s value when it inevitably goes public or looks to raise more capital.

“In order to change that view, LivingSocial would have to show significant profitability and a differentiated consumer offering,” said Jordan Rohan, a managing director at Stifel Nicolaus. “That’s what LivingSocial is trying to do.”

LivingSocial has sought to separate itself from Groupon, in part, by hosting one-time events, such as beer festivals and sushi-making classes, and constructing a multipurpose activity venue at 918 F St. NW.

But at a media day in June, the company said the vast majority of its revenue still flows from the daily deals business, with its discounted travel getaways contributing the second largest amount. Groupon offers similar services.

“From an investor perspective, the valuations are certainly going to be tied together because there is no other comparison and Groupon is the biggest, so why would they not be linked?” said Benchmark Company analyst Daniel Kurnos.

Groupon’s growth has been slower than many Wall Street analysts expected, yet the Chicago-based company turned a profit in its most recent quarter. The firm posted operating income of $46.5 million for the second quarter, up from a loss of $101 million during the same period last year.

LivingSocial posted a net loss of $93 million during the same quarter, an improvement from a $198 million loss during those three months in 2011. The finances were disclosed in a regulatory filing by Amazon, which owns a 29 percent interest in the company.

LivingSocial declined to comment on Groupon’s performance or the daily deals market, though executives said in June there are no immediate plans to go public and that the rocky public offerings of other tech firms have served as a cautionary tale.

“The market doesn’t appear to be receptive today,” Rohan said. “It could change. But right now it doesn’t appear like the market would be receptive to the valuations that would make the investors behind LivingSocial excited about going public.”

LivingSocial has faced other challenges in recent weeks.

The company confirmed it will shutter its business in the Middle East, after media outlets in the region first reported the company was looking to sell its operations there. LivingSocial entered several Arab countries through its acquisition of GoNabIt last June.

Spokesman Andrew Weinstein said executives began a review of the company’s domestic and international markets earlier this year with plans to curtail those that don’t have a clear path to profitability. He declined to say whether other markets will follow.

That news comes after LivingSocial fired three top executives and nine other employees in July as it restructures some of its District-based units.

The company also announced it would open a customer service call center in Tucson, where business and living costs are cheaper. Weinstein said there are no immediate plans to relocate workers from Washington, though he said it’s unclear how those operations will be organized down the road.

The D.C. Council approved a $32.5 million tax break for LivingSocial earlier this summer that’s predicated on the company hiring city residents in the coming years and keeping its headquarters in the District.

LivingSocial’s chief executive and co-founder, Tim O’Shaughnessy, is the son-in-law of Washington Post Co. Chairman Donald E. Graham.

Steven Overly covers the business of technology, biotechnology and venture capital in the Washington region for The Washington Post and its weekly Capital Business publication. In that capacity, he has written about start-up struggles, investment trends and major drug discoveries.
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