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Posted on 12 June 2011 | 13,343 views

Groupon’s Stock to Crash After IPO?

So, before retail investors start to think Groupon and its IPO might be a great deal, you may want to do a little research on the company before getting giddy about the upcoming deal. Groupon is a Chicago based company and will trade under the (Ticker Symbol: GRPN) according to the Initial Public Offering filing.

As Groupon prepares for its “Initial Public Offering“, analysts are digging deep into the daily deals and wondering whether Groupon’s worth the hefty $25 billion valuation. Basically, Groupon’s success is its ability to entice merchants with the promise that participating in its advertisement campaign will boost business and draw new customers.

Some merchants say “Groupon” was the “Single Worst Business Decision” they have made.

Jessie Burke, owner of Posies Cafe in Oregon, noted Groupon pushed her to offer a deal that would let users buy $13 of product for $6. Groupon originally wanted 100 percent of the money (what it usually takes when consumers pay less than $10 on a deal), but relented, revising their percentage cut of the deal price to 50 percent —  Posies Cafe saw an uptick in business but the cafe ended losing close to $10,000 because of the Groupon campaign.

Groupon had told her that 98 percent of the customers who came in for the deal would spend more than the value of the Groupon, most did not — and to make matters worse, the Groupon deal resulted in several administrative nightmares. Tracking 900 deals proved extremely difficult, and ended up in multiple instances of fraud with users redeeming the same Groupon more than once. The deal, scheduled by Groupon, ended up occurring at the same time as another business boosting event, so that huge lines formed out the door — not an ideal situation for a cafe.

Many other merchants have claimed that Groupons actually result in losses, administrative nightmares and don’t convert into new regular customers.

Groupon, the top provider of daily deals online, is following LinkedIn (Ticker Symbol: LNKD) by raising money from public markets. LinkedIn, the biggest professional- networking site, was the first major US “Social Media” company to sell shares to the public.

Although the IPO was successful, its stock more than doubled in the first day of trading, most retail investors couldn’t get into the stock until it reached the $120’s and with LinkedIn trading at $73.25 as of Friday June 10th, retail investors are now sitting on a 38% loss — and don’t think Groupon will be any different — retail investors may want to sit on the sidelines and let the stock find its trading range.

While Groupon’s sales surged 14-fold to $644.7 million last quarter, the company has racked up operating losses of $540.2 million since its founding in 2008. Groupon also faces competition in the market for daily coupons from hundreds of rivals, including LivingSocial as well as recent entrants Google (Ticker Symbol: GOOG), Facebook and Yelp.

Groupon delivers daily discounts on hotels, restaurants and other goods and services to 83.1 million subscribers. The daily- deal market pioneered by Groupon may generate $3.9 billion in US sales in 2015, from $873 million in 2010, according to research firm BIA/Kelsey in Chantilly, Virginia.

To handle the growth, Groupon bolstered its workforce to 7,107 employees as of March 31, from 37 in June 2009. Revenue per sales representative in the first quarter was $172,000 a month, up from $87,000 two years earlier, the company said.

Crazy Spending — Yes, Groupon is growing like a weed. But it is spending money hand over fist too. Groupon’s revenue exploded by 2,241% last year, the company’s second full year of existence. That is unbelievable. But its operating expenses ballooned even faster at 5,732%.

Groupon says it is focusing on growth, and at hiring as many people as it can to build its business. That’s normal for a young company but if a company’s losses get worse even as it scales up, maybe the business model doesn’t work at all. As they say, you can’t make up those losses in volume.

Early Investors Have Taken Out Nearly $1 Billion — Groupon raised a nearly unprecedented amount of venture-capital money, more than $1 billion, and yet most of that money is gone. Why? As some smarties have pointed out, Groupon’s investors and executives, including co-founder and biggest shareholder Eric P. Lefkofsky, and CEO Andrew Mason, have been using the new investor money to cash out some of their holdings, to the tune of $930 million.

That’s not exactly a sign of confidence — Lefkofsky alone sold about $315 million in his early voting stock. It’s natural for Groupon employees and early investors to want to convert some of their fictional, paper stock holdings in Groupon into real life, boat payment money. And some of those early investors reportedly got itchy when Groupon turned down an acquisition offer from Google for up to $6 billion. As the earlier investors sold off some of their holdings, Groupon was able to add a lineup of long-term investors, including T. Rowe Price but $930 million seems like an awful lot of boat payments.

A month ago, this IPO had a great shot at being an unqualified home run but now, with the housing market collapsing, the market scribblers are expecting a big slowdown in U.S. economic growth and the stock market is on track for its seventh straight week of losses. Conditions could improve by the time Groupon actually goes public or the market and economic backdrop could be even worse.

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  • Jessica Johnson said:

    Groupon’s Stock to Crash After IPO? http://bit.ly/iGqY9f

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