Groupon IPO Analysis

Timothy Plett
Vice President

Groupon has contributed immensely to the newest and the fastest growing market out there, the infant e-commerce market. Only a three year old company, Groupon has been recognized as one of the fastest growing internet businesses in US history. The consumer awareness of Groupon and how it works has spread like a wildfire with the company now doing business in more than 35 countries.

Groupon’s growth has developed an internal movement of private investments and IPO contemplations.

This begs the question: Now that the definitive decision has been reached that Groupon is going to be offered publicly- is this internet behemoth a worthy investment?

An analysis on the market, economy, and financial reports helps to justify a decision on whether or not the investment is worthy. Just like a doctor diagnosis a patient, every investor should consider all aspects of a company prior to making a move in the markets.

Let’s begin the analysis:

Groupon's Financial Prospectus

The review is condensed for the sake of viewers time, and opinions are labeled on the side. (This information was provided by the SEC Securities Commission Form-S1 Registration Statement):

Note: All personal opinions are highlighted and posted in an outlying text-box.

It can be seen above that Groupon has been projecting significant losses in the past three months. The prospectus goes on to describe the significant emphasis of marketing investments. Even though the company has shown tremendous growth, the increasing losses do not look appealing to investor’s eyes. Now, this all could be due to the global expansion which shows below a segment revenue which describes the 50% + revenue stream that Groupon receives from international business. This global presence is costly but provides long term security.


Next we take a look at growth in sales, customers, and merchants:

2^nd diagnosis is to look at strategy:

Is all this growth and spending on marketing and expansion proving to be really beneficial to Groupon? One problem that arises with a company that has a first mover advantage strategy and then enters into the stage of dramatic growth is the 2^nd mover in the market. Forbes magazine provides an article on companies like Microsoft that thrive on using the 2^nd mover strategy:

In most cases entrepreneurs are better off building the second or third version of the better mousetrap. Visicalc, the first desktop spreadsheet program, faded away as Lotus took over the field with 1-2-3. In time the Lotus software was itself crushed by MicrosoftMSFT - news - people )'s Excel. (nasdaq:

For that matter, Microsoft has a history of succeeding by not being first. Digital Research developed the first desktop operating system, called CP/M. But Bill Gates upstaged it in the competition to supply an operating system for ibm's pc. Gates didn't even develop the original DOS; he bought the program from Seattle Computer Works for $50,000. His genius wasn't so much in coding as in marketing.

Getting in early on Web commerce was supposed to be a brilliant move. The business plan was to raise a gargantuan sum in an initial public offering and use it to construct an impregnable brand and Web presence. But roaring out of the starting gate didn't help many of these dot-coms--or their stockholders. Lord help you if you bought shares in financial news site TheStreet.com (nasdaq: TSCM - news - people ) at its $19 initial offering price in 1999, let alone at the $60 level to which it leaped. You could have made some decent money if you had waited. The shares were available at 99 cents in October 2001; today they go for $11.

-Forbes Magazine (A. Gary Shilling is president of A. Gary Shilling & Co., economic consultants and investment advisers. Visit his homepage at www.forbes.com/shilling.)

Companies like Facebook, Google, and Living Social (biggest competitor of Groupon currently) all have found that Groupon’s idea is a worthy investment. They do not have to do as much research on the business and they can really focus on providing a more efficient/effective/profitable product or service.

3^rd Growth

This is where I see one very big problem. Groupon offers a very effective service to both consumers and the business market. But is offering a coupon sustainable?

Consumers go through cyclical phases. Remember when corduroys were popular to wear (no offense to those who still do)? It can be fearful that internet coupons may be phased about by consumers as well in the sense of familiar presence while surfing the internet. One example is Facebook, the side panel of Facebook offers advertisements which are posted daily. Groupon is one of the many companies that advertise on a daily basis. This repetition becomes very familiar to consumers and eventually becomes a habit in which case it is looked over.

Lastly, is Groupon diversified?

Say I am right and my consumer psychology theory does prove that people phase out of the internet coupon or daily deal. What does Groupon have in contingency, NOTHING!

Companies like Microsoft, Apple, and Ford all have other products that they can offer in case of a product/service becoming obsolete.

Diagnosis:

Groupon has a number of attractive reasons to say everyone should invest in it. Lastly, I say Groupon is a short term Bang & long term Bust.

Things that I see:

-Short Term Dramatic Growth
-Competitor growth
-Global market expansion

-High rise in post IPO stock

Things that I do not see:

-Sustainability

-Service diversification

Summary: I see a short term profit for investment with Groupon but I do not see sustainability in the long run. This makes a good short term investment and only a short term investment.