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Why Groupon Should Cancel Its IPO

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What is Groupon really worth? We may know more this week. The group-buying specialist is scheduled to meet with investors and bankers for the purpose of ratcheting its proposed IPO valuation down from more than $20 billion to $12 billion or less, The Wall Street Journal reports.

Color me unsurprised. Not only is Groupon unprofitable, but there's also no telling what management will have to spend to grow the business as outrageously as it has.

For its part, Groupon wants us to believe it has achieved massive economies of scale. Just look at how the company describes the economics of acquiring customers in its latest prospectus. On page 81, management gives the example of a "Q2 2010 cohort" group of 3.7 million subscribers acquired with $18 million in online marketing spending that went on to produce $92.8 million in revenue on 9.4 million Groupons sold over six quarters. The implication? Marketing is a minimal one-time cost that produces generous revenues downstream.

I'd love to believe that. Heck, I think we all would. But I've also bought just one Groupon since subscribing to the service more than a year ago -- and I'm not even sure what I bought or why. But who cares, right? Groupon doesn't report churn in its prospectus.

Yes, I'm being facetious there. How can it not matter when so many group-buying alternatives exist? From's (Nasdaq: AMZN  ) Living Social to Google's (Nasdaq: GOOG  ) Offers to localized alternatives tied to hometown newspapers, the only thing protecting Groupon's franchise is its brand name, which I'm not so sure matters when the whole idea of group-buying is to serendipitously snap up the best deals when they come along. Savings matters. As for who supplies the savings? Not so much.

And what about mobile options? Foursquare is working with American Express (NYSE: AXP  ) for card-centric one-offs, while Apple (Nasdaq: AAPL  ) has a "find my friends" function inside the new iOS 5 that could be made to show deals through iPhone notifications.

Interestingly, Groupon isn't pulling the IPO but rather adjusting the terms. The Journal reports that management will file to sell just 10% of the company's shares outstanding, raising $500 to $700 million and creating scarcity that could induce an artificial first-day IPO rally on the order of what LinkedIn (NYSE: LNKD  ) and Zillow (Nasdaq: Z  ) experienced.

Less skeptical Fools might see that ratio and wonder why executives aren't cashing out while they can. The logical answer would be that they believe a $20 billion or higher valuation is still achievable given the underlying strength of the business.

I hope they're right, but I also won't believe it till I see evidence that there is such a thing as a Groupon regular. Right now, the very idea seems as mythical as unicorns, leprechauns, and the five-star all-you-can eat $5 buffet.

Do you agree? Disagree? Please weigh in using the comments box below. And if you're looking for more IPO ideas, try this free report from my Foolish colleagues and me. In it, you'll get all the details on a newly public company that's remaking the quick serve restaurant business in Latin America. You'll also get a closer look at 10 more IPOs with soaring potential -- including a wireless rebel singled out by yours truly. Get your copy of the report -- it's 100% free.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Apple, Zillow, Google, and, creating a write covered strangle position in American Express, and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2011, at 10:44 PM, ayaghsizian wrote:

    I agree. For 20 billion dollars, I wonder what other highly profitable companies earning billions of dollars per year we could buy. There must be some better choices.

  • Report this Comment On October 25, 2011, at 10:59 AM, XMFBiggles wrote:

    @ ayaghsizian,

    That is a great idea, and I hope you don't mind if I borrow it.

  • Report this Comment On October 25, 2011, at 12:06 PM, DCUDFlyer wrote:

    So tempted to be a bull for the sake of going against the grain...but I cant think of a single attractive reason. Can someone play devil's advocate (a Fool, not a fool like GRPN's CEO)

  • Report this Comment On October 25, 2011, at 2:58 PM, hellomojo wrote:

    I agree.. I signed up over a year ago. I occasionally check the website to see what deals they have when I'm bored but have only ever purchased 2 for a total of $35. And both were for local restaurants I wanted to try out. I use the half off coupons in the local papers, mail flyers, or back of my grocery receipt more than Groupon and get the same deals without having to print anything or prepay for it.

  • Report this Comment On October 25, 2011, at 3:43 PM, fennecfoxen wrote:

    I think Groupon has a future as a business. But it sounds like buying a share of this business at these prices would be a lousy investment, risky and expensive.

  • Report this Comment On October 26, 2011, at 11:48 AM, griderX wrote:

    I think you nailed it with this sentence:

    "Savings matters. As for who supplies the savings? Not so much."

    Groupon doesn't have any patents to protect it's business from copy-cats. I think the smartphone/location based deals you briefly touched on are going to be very intresting.

    The rush to IPO is a means for early investors and insders to cash out on the hype before the business colapses...I HIGHLY doubt anyone 5 years from now will know Groupon existed ;)

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