Groupon’s IPO: Overhyped and Overvalued?

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Jun 08, 11 Groupon’s IPO: Overhyped and Overvalued?

On June 2, Groupon (GRPN) filed for an initial public offering that could potentially raise $750m. This enormous valuation is justified through its huge increases in revenue, user base and number of Groupons sold. However, on closer inspection it may seem that Groupon is playing a little smoke and mirrors. A toxic mix of net losses, increasing expenses, growing competition and loss in merchants should make potential investors think twice.

Investors shouldn’t expect profits anytime soon, since Groupon has failed to deliver a net profit in its first three years of operations. Groupon recorded a $389m loss in 2010 and $102m in the first quarter of this year. This trend will continue as Groupon has reported that expenses “will increase substantially in the foreseeable future.”

Additionally, the competition in the deal-sharing marketplace is just getting started. Given the low barriers to entry, Groupon will face considerable competition from various start-ups, and from Facebook and Google (GOOG), who have been actively trying to enter the space.

Most importantly, the number of merchants that have used Groupon’s services is declining as many fail to see repeat customers. While Groupon may be satisfying the paying public, businesses are disillusioned by the model and will eventually abandon Groupon.

Groupon’s IPO harkens back to the 1990s tech bubble through its focus on growth and free cash flow while sidelining the issues of profitability, growing competition and sustainability. Buyers beware.