Will You Buy Groupon Today?
The offering priced at $20 per share, higher than the initial range of $16 to $18, due to the hype leading up to today's debut. The company is being valued at nearly $13 billion, far higher than the $6 billion bid that Google (NAS: GOOG) put on the table last year. And that's before we factor in the 40% lift to $28 per share that I'm seeing as I write this.
Reports indicate that the offering was nearly 10 times oversubscribed, showing how much demand had outstripped the supply of shares being offered. To help compensate for the discrepancy, Groupon added another 5 million shares to the batch, bringing the total up to 35 million. That figure only represents just 5% of its total shares. The pile of cash being raised in the deal totals roughly $700 million.
In Groupon we trust?
The Chicago-based company has only been around for three years, but has quickly caught the attention of the Netizens and the investment world alike. In those three short years, the company has grown revenue at breakneck rates -- that is, if you can trust the numbers they've put up.
Groupon has had to revise its financials numerous times in the months leading up to today. The initial S-1 filed in June showed revenue Q1 of $644.7 million. The problem with that top line is that it was reported on a gross basis -- including the portion that goes to merchants -- which is a clear violation of accounting regulations. An amended S-1 filed last month cranked that same number down to just $295.5 million.
Then there was the controversy over its fantasy metric, "Adjusted Consolidated Segment Operating Income," which was promptly dropped after the SEC gave Groupon the third degree. After all, it's a pretty tough sell to say that online marketing expenses aren't relevant when you're an online marketing company.
Some of Groupon's other recent accounting changes are also worrisome. The company has changed how it defines certain expenses like marketing expenses, cost of revenue, and SG&A costs.
Group + Coupon = Groupon = Competitive Advantage?
Just about the only thing Groupon has going for it is its catchy name and first-mover advantage. A catchy name is hardly an economic moat or a competitive advantage, while having a first-mover advantage means little without those two keys to success. The online local deals space is being stormed by entrants, like Living Social, which counts Amazon.com (NAS: AMZN) as an investor, and Google, which rolled out Google Offers after being rejected. Even Facebook jumped in for a hot minute, but decided to bail after a few short months.
What's a Fool to do?
Buyer's remorse tends to sink in fairly quickly, and Bloomberg BusinessWeek adds some perspective with an infographic showing 25 of the "hottest" IPOs of 2010 and 2011 and how they've fared since reaching public hands. Out of the gaggle, 20 of them have gotten hammered, including Chinese dot-com wannabe darlings like Youku (NAS: YOKU) and Renren (NAS: RENN) .
Its IPO value of almost $13 billion makes Groupon worth more than popular official Foolish recommendations like Chipotle Mexican Grill (NYS: CMG) , Whole Foods Market (NAS: WFM) , and Rackspace Hosting (NYS: RAX) . All three of those companies have much more compelling investment theses and valuations. If you still need more alternatives to picking up Groupon, here's another handful.
There are plenty of reasons to steer clear of Groupon, including the risk of future surprises down the road. Do yourself a favor : Avoid the hype and watch this one from the sidelines. Full disclosure: I also fully intend on opening a bearish put spread in anticipation of Groupon tanking once the glow wears off -- and once I'm past our trading restriction window.
Don't follow the group on this one; don't buy Groupon today.
Add Groupon to your Watchlist to see it drop after the hype wears off. Sign up for free trials to Motley Fool Stock Advisor or Motley Fool Rule Breakers to read the investment theses for Chipotle, Whole Foods, or Rackspace and learn why those are much better candidates for your portfolio.
At the time this article was published Fool contributor Evan Niuowns shares of Amazon.com and Whole Foods Market, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Google, Chipotle Mexican Grill, and Whole Foods Market. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill, Whole Foods Market, Rackspace Hosting, Amazon.com, and Google. Motley Fool newsletter services have recommended creating a put butterfly position in Chipotle Mexican Grill. 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.
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