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.
