If you could buy into Groupon’s $750-million IPO would you do it?
Most people would probably say “Absolutely” given Groupon’s strong brand and its dominance of the group-buying marketplace. Not me.
There’s no doubt Groupon shares will pop after they start trading but this will be a matter of supply-demand and the reckless enthusiasm of retail investors as opposed to a focus on fundamentals. You also have to remember IPO offerings tend to be priced to generate a first-day pop so investors feel better about their purchases and the company gets to bask into the glory of a successful offering.
But don’t be fooled by GroupOn’s market stature or the sexiness of its IPO. Groupon smacks of the crappy IPOs that suckered too many investors during the original dot-com boom.
Why the skepticism? Fundamentally, I don’t think Groupon is a good business with solid fundamentals. Its balance sheet clearly demonstrates it is spending way too much money on marketing to acquire new customers. In the first quarter of 2011, it lost $146.5-million after being $413-million in the red in 2010.
Second, it’s a business that will have a difficult time scaling. The company has more than 7,000 employees, and the more it grows, the more employees it will need.
Third, the marketplace is ultra-competitive and the barriers to entry are low. While Groupon is the market leader, there are plenty of strong rivals, including many who raised large amounts of venture capital. It means Groupon will need to continue to aggressively spend on marketing to grow or even maintain market share.
Fourth, I’m not convinced the group-buying phenomena will maintain its sexiness or appeal. For consumers, group-buying has been a novelty but pretty soon that will start to wear off. At the same time, many Groupon customers will fall off the bandwagon after realizing they haven’t taken advantage of the services they have purchased.
For companies, Groupon won’t make a lot of sense because offering deep-discount to attract customers on the belief they will stick around to buy products or services at regular prices isn’t a good way to do business.
Finally, the struggling U.S. economy will have a major impact on consumer behaviour. U.S. consumers have taken a cautious approach to spending so it’s uncertain whether they will be attracted to the kind of deals Groupon is offering, even if there are attractive discounts.
For more on Groupon’s IPO, check out VentureBeat, which has a cool infographic via Online MBA about the company’s history. BusinessInsider also has a good post looking at Groupon’s financials.
