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What You Haven’t Heard About the Groupon IPO (GRPN)

Groupon (Nasdaq: GRPN), the online leader in daily coupon deals, went public on November 4 and sold $700 million worth of stock in its first day of trading. This was the largest IPO by a tech stock since Google (Nasdaq: GOOG) raised $1.7 billion in its 2004 stock market debut.

But having sold a measly 5.5 percent of itself to the public, Groupon's IPO was more mirage than smashing success.

By offering such a small stake in its company to investors, Groupon tapped into an IPO loophole. The 5.5 percent was the second-smallest share float in the U.S. in the past decade, according to capital markets data provider Ipreo. With so few shares available – just 35 million, to be exact – demand for Groupon IPO shares was overinflated, and allowed the company to bump up the share-offering price to $20 from its expected $16 to $18 range at the last minute.

Sure, Groupon was able to raise more money in its IPO than any Internet company since Google, making it seem as if the company's long-anticipated debut on the stock market was one for the ages. But it manipulated the IPO process to get there.

In a typical IPO, a company offers investors about 20 to 25 percent of its shares. Admittedly, tech stock IPOs are usually less than that. Google sold just a 7.2 percent stake in its IPO.

LinkedIn (NYSE: LNKD) and Pandora (NYSE: P), both of which hit the market earlier this year, sold stakes of 8.3 percent and 9.2 percent, respectively. While still small in percentage of shares sold in their IPOs, these other offerings were meaningfully larger than Groupon's first-day sale.

Groupon has never been profitable since the Chicago-based company was founded in October 2008. That's right – never in the company's three-year history has it made money! And yet, because of its rapid revenue growth and leading stature in the online coupon business, Groupon was able to 'go public' and now has a market capitalization of $15.3 billion.

$15 billion is a lot of money. Just consider these well-regarded, established companies – with histories of consistent profits and growth – that could be bought for less than $15 billion:

  • Dr. Pepper Snapple Group (NYSE: DPS): $7.83 billion market capitalization
  • Gap (NYSE: GAP): $10 billion market capitalization. 
  • Combined value of LinkedIn (NYSE: LNKD), Pandora (NYSE: P), and Netflix (Nasdaq: NFLX): $13.5 billion

IPO experts have caught on. Josef Schuster of the Chicago-based IPO research firm IPOX Schuster Inc. told Bloomberg BusinessWeek that "what Groupon is doing (in its IPO) is way outside what should be acceptable."

More importantly for investors, its stock price is unsustainable. Groupon's current valuation is more than six times its projected 2012 sales of $2.1 billion. By comparison, Amazon (Nasdaq: AMZN) is trading at about 1.5 times its 2012 revenue, while Microsoft (Nasdaq: MSFT) trades at 2.9 times its projected 2012 revenue.

Furthermore, Groupon's revenue growth was actually slowing prior to going public. The company reported $430 million in revenue in the third quarter, a 10 percent improvement over the second quarter in which revenues were up 33 percent from the previous quarter.

While its subscriber numbers have skyrocketed the last few years from 150,000 to 83 million, its monthly revenue per subscriber has dipped from $21.69 in June 2009 to $7.76 after the first quarter this year.

In other words, let's not proclaim Groupon the next Google just because its IPO is being mentioned in the same breath as the world's premier search engine.

For one, Google was six years old when it went public in 2004. While that may not be the long track record that many investors like to see, it was twice as old as Groupon when it went public. When it filed its IPO, Google had turned a profit every year since 2001, including a whopping $105 million in profits in 2003.

Plus, by the time the company went public, the word "Google" was already part of the mainstream lexicon. There are plenty of people today who wouldn't know whether Groupon is a deals website or a large saltwater fish.

Groupon may yet prove that its IPO wasn't just a flash in the pan. Perhaps the $700 million it raised will allow the company to cover some of its operating losses and drum up enough publicity to finally make it profitable. But that still doesn't change the fact that Groupon is painfully overvalued at the moment.

It found a way to manipulate the IPO process into giving the company a market capitalization it frankly doesn't deserve.

Until Groupon proves it can take its interesting online coupon and local marketing business to the point of consistent profitability, its pricy shares are unlikely to see much appreciation.

Investors today will be better off investing in proven companies whose shares are attractively priced.

Ian Wyatt
Editor, Daily Profit
Boston, Massachusetts

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