Jury Out On Ginormous Groupon IPO

by Gavin O'Malley, Nov 4, 2011, 9:38 PM

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Despite a host of well-documented concerns, investors went gaga over Groupon on its first day of public trading.

It didn’t hurt that the deal leader was only out to raise $700 million by selling 5.5% of available shares -- far less than previous tech IPOs from Google to LinkedIn. Still, as analysts noted, the initial enthusiasm for Groupon has implications for other Web darlings, and their own IPO ambitions.

On Thursday, Groupon priced its IPO at $20 per share -- above its expected range of $16 to $18. The move gave the company a market value of $12.7 billion.

By Friday afternoon, Groupon's stock jumped $8.30, or more than 40%, to $28.30 -- increasing the company’s value to around $18 billion.

Still, whether Groupon will retain its high value in the coming weeks and months is far from certain.

In a note to investors, Evercore Partners analyst Ken Sena valued Groupon between $8 billion and $10 billion, and warned that the company faces increasing competition and deal-weary consumers.

“We think that the competitive advantage is not sustainable,” Jim Krapfel, an equity analyst and IPO strategist at Morningstar, said late Thursday. “There are just no barriers to entry here.”

What’s more, “we don't think [Groupon] has been able to scale their costs appropriately,” Krapfel added. “They've continued to generate losses, and likely will continue to do so unless they ratchet down their marketing spend, which they have been doing recently -- but that's come at the expense of growth.”

Along with its oversized employee base -- and the way it accounted for revenue until an SEC inquiry prompted a restatement -- many believe that Groupon spends way too much money on marketers.

"Back of the envelope calculations … get us to $31 spent to acquire a customer, who then probably spends a little more than that on Groupon," Forrester Research analyst Sucharita Mulpuru wrote in a recent blog post.

As a result, largely attributed to expansion and marketing costs, Groupon lost $420 million last year, and $117.1 million in the first quarter of 2011.

Yet not all analysts were bashing Groupon on Friday.

“We expect a combination of more diversification of offerings, including travel and product deals, to combine with geographic expansion to drive total Groupon gross billings growth of 450% year-over-year in 2011 to $4.1 billion, leading to $1.6 billion of revenue,” Benchmark Managing Director Fred Moran explained in a research note.

“Groupon’s dominant position in the rapidly emerging daily deals segment of local commerce could lead to exponential growth and a potentially highly profitable enterprise,” Moran added. “We recommend investors participate in the IPO of Groupon.”

Citing a volatile stock market, Groupon postponed its IPO earlier this year, and pushed back meetings with investors.

With an eye on the future, Groupon recently debuted a Rewards product, which is designed to help merchants increase customer loyalty by giving said customers a good reason to keep coming back.

Groupon built its business by getting local merchants to offer great one-time deals to consumers. Rewards, by extension, is all about bringing back -- and nurturing relationships with -- existing customers.

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