Earlier this year investors were chomping at the bit for a Groupon IPO. Just the notion that a public offering would materialize, stirred talk of a tech valuation bubble, as numbers as high as $20 billion were thrown around for its initial public offering. Among the factors stirring the pot were multi-billion dollar offers from Yahoo (YHOO) and Google (GOOG), the latter of which was willing to fork over as much as $5.75 billion before the deal fell through.
Today those sorts of massive, headline making offers have petered out. In their place are questions surrounding the company’s curious accounting methods and inability to turn a profit. Earlier this year, Groupon, which will trade under the ticker GRPN, began promoting its IPO while employing an income number that excluded marketing and customer acquisitions costs. The result was not only misleading, but prompted many, including the SEC and potential investors, to question the company’s actual value.
Even with these factors looming, Groupon’s IPO is valued at approximately $11 billion. The number seems especially strange considering that 2010 operating losses at the daily deal provider were around $420 million or to use another metric; Groupon spends around $1.43 in order to bring in $1. Looking at it from this perspective, Groupon’s IPO appears to be one of the worst deals its ever offered.
Perhaps recognizing that these statistics are not going to draw the masses they had initially hoped, Groupon has chosen to unleash only a small number of shares in their IPO on Friday. Only 4.7 percent of the company will be offered, a small enough number to attract at least some risk prone IPO chasers. The tiny number of shares being put forward will likely act as a boon in the short-term, keeping the company from sinking immediately upon its debut. In the coming months; however, Groupon may go the way of Pandora. Pandora, like Groupon, had a major buzz surrounding it and an idea that inspired a multitude of copycats. They share another important element in common as well: that excellent idea failed to generate significant profits.
The struggle to profit weighed on shares of Pandora (P), which climbed in the weeks following its IPO but soon sunk, as early investors became concerned about failure to produce income, and began shedding shares. Groupon, should it continue to underperform in profit generation, will experience similar backlash. This time the plunge could be even more dramatic, considering the inflated starting price of around $11 billion compared with Pandora's $2.5 billion. Couple this with fast changing attitudes about Groupon and daily deals in general, the slim offering of shares may not be enough to boost it to attractive levels.
In the long-term, not only does Groupon have to concern itself with the prospect of early investors shedding shares, but also with the seemingly limitless number of daily deal companies that have sprung up in its wake. Living Social, which has been less buzzed about than Groupon, has been lauded for offering more compelling deals and celebrated for having a higher buy rate. Simultaneously, Amazon (AMZN), Google (GOOG) and American Express (AXP) have all launched Daily Deals that could continue to usurp market share that Groupon needs to carry it to profit.
Losing buyers is only half the challenge though; Groupon must also contend with disappointing some of the nearly 80 million merchants it has worked with since its inception in November 2008. Groupon has been harshly criticized for taking too steep a chunk of the service prices at the restaurants, doctors offices and spas it orchestrates its deals with. After the 50 percent of the total price of the coupon is turned over to Groupon, the majority of these businesses are actually losing money. They may agree in the hopes of creating repeat clients, but when Groupon customers fail to reappear, the incentive for a second round of Groupons is diminished. Simultaneously, as this becomes public knowledge, new merchants are beginning to be put off. If fewer businesses agree to participate in the coupons or a competitor is able to offer a more compelling deal to the business owner, it could continue to diminish the possibility of profits.
The threats facing the company, from internal operational failures to competitors and issues with its long-term business model make a share purchase, at least one that doesn’t involve buying and immediately flipping, a dangerous undertaking.
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