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 Amazon.com'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.
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