Groupon Is Cheaper Than You Think

I'm thinking of a big dot-com IPO.

Some argue that the company went public too soon, just a couple of years after launching its undeniably popular website. Armed with an advertising model still in its infancy and dreams of an initial market cap close in excess of $30 billion, the company ran into a few speed bumps with regulators. This online speedster ultimately had to scale back its offering to get a deal done. There were plenty of skeptics given the still lofty valuation, but the stock still popped higher on its debut.

Would you short this company?

If you're nodding your head, congratulations: You just shorted Google (Nasdaq: GOOG  ) at $85.

Comparing Big G to Groupon (Nasdaq: GRPN  ) isn't heresy.

Sure, Google had been around for nearly six years at the time of its IPO -- not two years like Groupon -- but its AdWords advertising platform was less than four years old at the time of its IPO. Google AdSense, the breakthrough site-targeted program that put Big G on the map by monetizing third-party websites, was launched the year before the IPO.

Google was bigger and profitable, but it also hit the market with a $23 billion market cap at $85. At the high end of its original price range, Google would've gone public at $135 a share to value the company at more than $35 billion. It had to scale back its expectations, just as Groupon did heading into Friday's IPO. The difference here is that Groupon -- at $20 -- went public as a $12 billion company.

You don't like Groupon's super-voting share class structure? We were skeptical after watching Google do that in 2004, too.

If you think Groupon's had some boneheaded moments during this year's IPO process, consider that Google neglected to register a chunk of shares and a poorly timed Playboy interview threatened to delay the offering's quiet period.

An IPO doesn't have to be smooth to be a hit. If you don't like the funky accounting metrics that Groupon had to undo to appease regulators or that it was booking gross bookings as revenue, consider that Google was hesitant to back out traffic acquisition costs -- primarily the money it pays to its AdSense partners -- the way that rival Yahoo! (Nasdaq: YHOO  ) was doing at the time.

Obviously, the similarities between Google and Groupon don't necessarily mean that it too will be a seven-bagger in seven years. However, I don't think it's an unfair assumption to liken investor apprehension to Google's then-nascent ad model to what Groupon is doing today at half of the initial valuation.

It's easy to argue that the moat is suspect, but if that's the case, why have Facebook, Yelp, and, as of last week, OpenTable (Nasdaq: OPEN  ) passed on the daily deals model? If it's a breeze to roll out a Groupon clone, why are Groupon and Amazon.com (Nasdaq: AMZN  ) -backed LivingSocial the only two players that everyone is talking about? If group coupons don't work for either merchants or consumers, why is revenue growing so quickly here? Groupon cleared more than $1.5 billion worth of vouchers through the first six months of this year.

When everybody seems to agree that a stock is overvalued -- as we're seeing with Groupon -- it's time to take a contrarian approach.

It did work for Google, after all.

If you want to follow the daily deals leader to see if it becomes a bargain itself, add Groupon to My Watchlist.

The Motley Fool owns shares of OpenTable, Google, and Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo!, Amazon.com, OpenTable, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (10) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On November 07, 2011, at 10:24 AM, brightkid wrote:

    ridiculous heretical article. Comparing a flawed business model,

    1) which exists because it is new, and people are willing to try it, even though repeat customers (the reason the business offers the big discount to get them into the door) are rare, as they are always seeking new coupons.

    2) even if the business is viable, for a company like Google/Bing, with a lot of traffic, can easily create an online business without all the sales reps where companies can go there directly, and enter in the deal they wish to promote.

    This company is losing money, by any metric, and Google does something (search) the best, and people love using it.

    Groupon will be lucky to be in business a few years from now, if they are lucky they will b e swallowed, before Google, amazon, or even Bing, stomps them.

    buy Google instead! http://seekingalpha.com/article/303502-google-search-good-lo...

  • Report this Comment On November 07, 2011, at 10:28 AM, AJNewbie wrote:

    Wow. Comparing Groupon to Google. That is the most ridiculous thing I have heard. I have always been a fool's fan but now I am begining to doubt the Gardner brother's judgement and motive. Netflix was a good call but defending netflix when they decided to hike the price and split the company just shows lack of judgement and to some degree common sense ( and it proved so in the next few days). And now the trend seems to continue with Groupon.

  • Report this Comment On November 07, 2011, at 11:10 AM, snommis69 wrote:

    Groupon is a one trick pony... and doing a trick that many other ponies can do as well. I think Groupon will be trading at sub-IPO prices fairly quickly. Heck, my local TV stations do similar daily deals on their web sites.

  • Report this Comment On November 07, 2011, at 11:19 AM, TMFBreakerRick wrote:

    AJNewbie, for the record, Tom and David had absolutely nothing to do with this article. It is my article, and I have a fresh memory of the pessimism by many when Google did go public in 2004.

    I also remember the resistance when Google embraced the paid search model before going public.

  • Report this Comment On November 07, 2011, at 11:47 AM, dundundundun wrote:

    So I get it. you write an article like this so everyone can tell you how ridiculous it is. Then you spend the next couple years just hoping Groupon turns out ok. Then you link back to this article.

    Thats great strategy. I mean, if you do it for 100 companies, Im sure you'll have a winner.

    "I told you all years ago Groupon would..."

  • Report this Comment On November 07, 2011, at 5:36 PM, starz188 wrote:

    The key word in the whole article is "profitable".

    --> Google was profitable when it went public.

    Groupon's finances have been carefully scrutinized by regulators and Fools on the site - in fact it was some questionable accounting that helped delay the IPO date.

    Groupon isn't profitable. The number's don't work, even when scaled up. Revenue doesn't mean a positive net income, and that's the key difference between Google and Groupon at the time of their respective IPOs.

    One-trick ponies can play out to be powerful companies, but they have to do that one trick profitably.

  • Report this Comment On November 07, 2011, at 5:49 PM, Mega wrote:

    "If group coupons don't work for either merchants or consumers, why is revenue growing so quickly here?"

    Obviously revenue is going to grow quickly since Groupon and merchants are willing to lose money on every deal. If they raised rates to make a decent profit, revenue would plunge (see Netflix).

  • Report this Comment On November 07, 2011, at 5:53 PM, StockReaperGT wrote:

    This article can be dismissed because of two very flawed statements:

    1. "Google was bigger and profitable, but..." the way this is glossed over in the article is laughable.

    2. "but if that's the case, why have Facebook, Yelp, and, as of last week, OpenTable passed on the daily deals model?" How about because these other companies realized that there's no money to be made in it.

  • Report this Comment On November 07, 2011, at 5:59 PM, StockReaperGT wrote:

    The sad thing about this is that the insiders who have all cashed out (because they know this is a scam) are not going to face criminal charges when this "company" crashes and burns.

  • Report this Comment On November 09, 2011, at 4:10 PM, Rogo wrote:

    Your mistake here is the belief that revenue is growing quickly. Revenue has more or less stopped growing in cities that have been up and running for more than one year.

    There are no parallels to Google, so stop making them. Talk about foolish.

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