Social-networking coupon peddler Groupon (Nasdaq: GRPN ) came public on Friday in a market debut that valued the company at $12.8 billion. It was the largest U.S. Internet company IPO in seven years.
Groupon is just the latest in a series of hot Internet IPOs, from LinkedIn (NYSE: LNKD ) and Pandora Media (NYSE: P ) to Chinese Facebook Renren (NYSE: RENN ) and Internet security provider Qihoo 360 (NYSE: QIHU ) .
Like many of those newly minted public companies, Groupon's growth has been mind-boggling. It's gone from $0 to $1.3 billion in revenue in just three years. But all that growth comes with increased selling and marketing costs -- which hit nearly $1.5 billion over the past year -- as well as competition from daily-deal sites such as LivingSocial and Travelzoo (Nasdaq: TZOO ) and more established players such as search engines and priceline.com (Nasdaq: PCLN ) .
I asked a group of Fools for their thoughts on whether Groupon presents an opportunity today.
Jason Moser, Fool analyst:
Given that Groupon turned down Google's (Nasdaq: GOOG ) offer makes me wonder if management doesn't need a coupon to have their heads examined. The barriers to entry in this market are low at best, and with companies like the Google (Google Offers) and Amazon.com (Nasdaq: AMZN ) working their way into the daily-deal space along with other popular names like LivingSocial, I'm not sure what separates Groupon.
The bottom line is this type of service exists to offer customers the best deals, period. This implies that there ultimately is no loyalty to any one particular brand. There's nothing preventing me from using a combination of a number of services as long as I get the best deal. So in the end, consumers win for sure. But if investors want to win, they'll look for a better deal elsewhere in the market.
Erin Kennedy, Fool editor:
I'm sure CEO Andrew Mason is positively thrilled Groupon has achieved a market cap more than twice the $5.75 billion Google offered to acquire it last year. At the time, rejecting the offer seemed crazy. The launch of Google Offers made me doubt Groupon even more -- what upstart wants to compete with Google?
And while it appears Groupon may have the first-mover advantage, I still won't buy any Groupon, and I'd give some serious side-eye to anyone who would. The company has problems retaining executives, having lost its founding CTO and two COOs this year alone. In addition to fleeing management, the S-1 the company filed over the summer with the SEC showcased some creative accounting. I'm simply not confident in Groupon's management -- they can't stay put, and they can't work a calculator. That's not a company that's getting my investing dollars.
Jeremy Myers, Fool analyst:
I've been skeptical about the daily -deals business for a while because of the relatively low barriers to entry. It seemed like everyone was jumping into this space, but surprisingly, big names like Facebook, Yelp! and OpenTable (Nasdaq: OPEN ) tried their hand and then exited the business. Google and Amazon.com are still making a run at the daily-deals market. Each company has a bunch of cash to throw at the business, and they are differentiating themselves by offering merchants better terms, like faster cash disbursements, that should help them to sign up more merchants and improve their offerings.
At this point, Groupon has a first-mover advantage and has built a formidable sales force, but that sales force might also be the company's Achilles' heel. The company needs to constantly add salespeople to expand into new territories and canvass for new merchants. This means the business model doesn't scale well, which makes me question how much upside there is even if the company eventually becomes profitable. Also, there's been a lot of debate over how successful these daily deals are at driving residual business to the merchants that offer the deals. For Groupon to succeed, it needs to prove to merchants that these deals will help them grow their businesses also. Until we start hearing about a significant percentage of merchants returning to do repeat deals, I'm going to stay away from Groupon.
These Fools seem skeptical of Groupon's prospects. If you're looking for a great stock idea, I invite you to check out The Motley Fool's special report, The Hottest IPO of 2011. You can download it for free.