(Over)Valuing Groupon IPO (GRPN, GOOG, LOCM)

Groupon is fighting a serious headwind to come public.  We have raised flags of caution on this numerous times and the calls against the company are only seeming to become more vocal in the financial media.  Our tales of caution are varied from insider cash-outs to a massive cash burning to operating losses.  We had called this one of the 17 most important IPOs to watch for 2011 and that actually still stands.  It is an important IPO, even if we have serious issues with it.

Our single biggest complaint is one that no one else seems to focus on: ZERO BARRIERS TO ENRTY for any company which wants to compete.  Groupon did not invent social media.  It did not invent coupons.  It also did not invent email.  At the end of the day, the only unique thing we can find about the Groupon business model is the amount of cash it burns generating new daily deals for its customer base. A site called Restaurant.com had already been doing this exact same service for quite some time before Groupon got off the ground. 

Google Inc. (NASDAQ: GOOG) tried to acquire Groupon for $6 billion or $7 billion or something that would have really punished the company according to analysts, but Groupon walked away wanting far more capital.

The original filing was for up to $750 million, but that appears to now be a bit lower.

We are concerned about the company only just recently changing its revenue recognition model.  There is something called “ex-TAC revenues” for search engines and that is to eliminate traffic acquisition costs from the revenue because otherwise the gross revenues look far higher and real underlying profit margins go right out the door.

We can sit here and join in on the Groupon IPO all day, but there is really nothing left to say.  Whether Groupon comes out at $10 billion, $12 billion, or more… We just can’t get there mentally to give this one a “thumbs up” for IPO investors and for post-IPO investors. 

We have also noted that Daily Deals Ads are now headed to advertise on blogs.
IPO bubbles are being formed according to industry analysts.  As far as competition goes, we have noted over and over how easy it is to compete.  Local.com Inc. (NASDAQ: LOCM) already went after Groupon for very little money. Also, here is a whole wave of public companies which can compete on the cheap with Groupon.

Here are just some of the media summaries in the last 24 hours:

• The New York Times: Groupon May Value Itself in I.P.O. at Close to $12 Billion… preparing for an investor road show for its planned initial public offering, with a valuation sharply below initial expectations.
• Wall Street Journal: Groupon Scales Back IPO.. scaling back plans due to market volatility… now expected to seek a valuation of less $12.5 billion, down from roughly $20 billion.
• @herbgreenberg on Twitter: our pal and all things $GRPN @rakeshlobster a says that “even at 12b Groupon” will still be overvalued.

The best quote out there by far is being attributed to an analyst named Brian Blair: “This is actually a Groupon on the Groupon IPO. You get it at half price.”

JON C. OGG