Groupon Offers Best Bargain Ever

$1 billion. $2.3 billion. $6 billion. (Hike!)

As the purported price tag for Groupon grows fatter than a turkey-stuffed American on a holiday weekend, Fools are beginning to wonder: "Is Google About to Make a $6 Billion Mistake?" Why, just yesterday, my Foolish colleague Rick Munarriz argues there's no need to buy Groupon. That Travelzoo (Nasdaq: TZOO  ) ,  OpenTable (Nasdaq: OPEN  ) , AOL (NYSE: AOL  ) , or Yahoo! (Nasdaq: YHOO  ) can easily duplicate the company's business model. That some of them are doing so -- and that Google (Nasdaq: GOOG  ) could, too. Many believe that Google paying $6 billion to buy Groupon is just plain insane.

I disagree.

A bargain's a bargain, no matter the price
Why? Because the numbers prove it: If Google can grab Groupon for $6 billion (or less), it'll be getting more than just a "daily deal." Google will score the deal of the decade.

Consider: As recently as a few days ago, most analysts on Wall Street were speculating that privately held Groupon did $500 million in business per year. At a total purchase price of $6 billion ($5.3 billion upfront, plus a $0.7 billion earn-out), Google would be paying 12 times revenues for that revenue stream. Not a screaming bargain, but not much more than it paid for DoubleClick in 2007, and a whole heckuvalot cheaper than the 150x sales multiple Google antied up for YouTube in 2006.

Crazy cheap
And it gets better. $500 million was the sales number analysts ascribed to Groupon last week. Already today, people close to the company are hinting that Groupon is bigger than we think. One figure now making the rounds: Groupon's annual revenue run-rate hit $1 billion in 2010, and is on track to leap 50% in 2011. If true, this suggests the P/S ratio of a $6 billion Groupon would drop to 6-times, or perhaps even lower, to 4x sales.

Now let's put those numbers in context. Google itself sells for 6.6x trailing sales, and 5.4x its projected revenues for next year, which are expected to grow 22%. In other words, Google appears to be buying a faster-growing company (50% versus 22%) -- and paying a lower sales multiple for it.

Better than a fruitcake
To top it all off, this would ensure Groupon won't turn up as an arm of Microsoft's (Nasdaq: MSFT  ) Bing search engine tomorrow. Nor will Amazon.com (Nasdaq: AMZN  ) get its grubby little hands on Groupon (which you know it would love to do, post-Woot!)

But Fools, that's all just icing. The valuation is the real cake here, and to me, it looks right tasty. Even at $6 billion.

Fool contributor Rich Smith owns shares of Google. The Motley Fool has a disclosure policy.

Google and Microsoft are Motley Fool Inside Value recommendations. Google and OpenTable are Motley Fool Rule Breakers picks. Amazon.com is a Motley Fool Stock Advisor choice. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (3) | Recommend This Article (7)

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 December 02, 2010, at 2:13 PM, smartthinker11 wrote:

    The next to go will be -

    1. Livingsocial.com

    2. Buywithme.com

    3. Dealon.com

    4. Bloomspot.com

    5. Yelp.com

    6. Zagat.com

    7. Opentable.com

    8. Crowdcut.com

    9. Blackboardeats.com

    10. homerun.com

    With eye balls, any of these other group buying sites can be a hit.

  • Report this Comment On December 08, 2010, at 5:26 PM, ebarrett4 wrote:

    Not a very compelling argument for the price tag. Munarriz raises a number of reasons why such a valuation is overpriced. In my opinion, shrinking margins going forward is a legit concern and will surely slow the revenue growth of any local deal site. That said, if GOOG gets behind Groupon, the current market leader in this niche, the resulting product would in all likelihood dominate its niche. Without seeing Groupon's books, it's difficult for any outsider to fairly value this deal but I'm putting my faith in GOOG's management to pay a price that makes sense.

    LT GOOG

  • Report this Comment On March 02, 2011, at 5:38 AM, jeff432 wrote:

    Have you guys heard of the new Groupon like site?

    It's the same thing as Groupon except when someone signs up through your referral link, if they or anyone they sign up ever buys a coupon from this site (which you get in a daily e-mail), you earn 5% commission of the coupon purchase price! You earn 5% commission up to 5 levels deep!

    Also, if you sign up a business and they ever offer a coupon, you get 2% of all of their coupon sales!

    About 1000 members are joining everyday now.

    It is 100% free to join.

    There are no coupons yet since the company is in pre-launch.

    It is launching around March 2011 though!

    Check it out:

    http://newgroupon.thecustomeradvantage.com

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