10/26/2011 5:11 PM ET|
At half off, is Groupon a buy?
The site has scaled back its IPO in response to a weak stock market, executive exits and questions about its accounting and business model. But the debut may still be a tough sell.
As with half-price crochet lessons, Groupon's newly planned stock offering is sharply discounted from a price that was arbitrary to begin with.
The company is seeking to raise $621 million for a sliver of its shares, which would imply a market value of $11.4 billion, The Wall Street Journal reports. That's down from an estimated value of $15 billion to $20 billion -- with some projections as high as $25 billion -- that would have resulted from an initial public offering that was scrapped earlier this year.
In June I wrote that Groupon's theoretical price was preposterously high relative to its revenues, not least because its revenues weren't really income.
Groupon holds no inventory but rather markets goods and services on behalf of merchants in exchange for a cut. It was claiming not only its take but also the merchants' as revenues.
Last month, after regulators questioned the practice, Groupon said it will restate revenues, reducing them by more than half for the year. It also said its No. 2 executive had left for Google (GOOG, news), which has launched its own local discount service called Google Offers.
Last week, Groupon released third-quarter results showing that revenues climbed 9% from the second quarter. That's a sharp slowdown from growth of 33% during the second quarter and 72% during the first.
With world stock prices having tumbled since summer, investors and the media have turned less cheerful toward Groupon. Chief Executive Andrew Mason called criticism "insane" and "hilarious" in an August memo to employees but has remained quiet of late, so as not to violate rules regarding information released just before a stock offering.
Some of the criticism is overdone. If Groupon indeed secures an $11 billon stock market value, its Nov. 3 offering will have been anything but a flop.
Not quite a year ago, Google offered $6 billion for the company. If the valuation strikes some as silly, that's the fault of investors, not Groupon.
For that matter, if discounted massages and yoga visits strike some as consumerist fluff, it reflects only on the shoppers who bought 33 million Groupons last quarter.
Prospective buyers of the stock should exercise caution, however.
In June I estimated Groupon's pending price-to-sales ratio at 18. It's around one-third of that now, but that's still a lot for a profitless company with sharply slowing sales growth and more than a dozen competitors.
The company has also exhausted much of its expansion potential. In June 2009 it operated in five North American markets. It's up to 175, plus 40 countries.
"In any market in America, you can sell $500,000 of half-off manicures and teeth-whitening procedures in a year just by hanging out a shingle," wrote Sucharita Mulpuru, an analyst with Forrester Research.
Groupon's expansion into new cities is akin to a retailer opening new stores, so what matters is its "same-store" sales growth, which has been sharply slower than its total sales growth, according to Mulpuru.
Will the stock jump on its first day of trading? That depends on Morgan Stanley (MS, news), Goldman Sachs Group (GS, news) and the deal's other underwriters. If they do well by both their investment banking clients and their retail investors, the deal will raise the maximum that the public will pay, nothing more, and shares will be little changed on their first day. Of course, that rarely happens.
And the tiny size of the Groupon deal seems to set the conditions for a scarcity of shares, a run-up in the price and -- pure speculation here -- a follow-on offering in which insiders sell more.
So if you're thinking about buying Groupon shares with money you'd otherwise bet on a horse, go ahead. Grab some on a dip and try to unload it on a more eager buyer a day or two later.
If, however, you're a long-term investor looking to settle down with a dot-com stock, go for Google instead. It's fairly priced, stuffed with cash and, seven years after its stock offering, it's still expected to grow its sales by more than 30% this year.
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