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Groupon no bargain at even half the price Add to ...

You can scoff at the sky-high valuations bandied about for Facebook, but it’s not the easiest target in what seems to be a second Internet bubble: Try, instead, Groupon at $25-billion (U.S.).

That is the number that leaked out in a report last week from Bloomberg News, as the Internet couponing company was said to be in talks with investment banks. The proposed initial public offering would assign Groupon a valuation of $15-billion to $25-billion, Bloomberg said.

Rarely does an investment columnist get a chance to recommend you avoid a stock that isn’t close to being available yet. But Groupon presents an opportunity even more enticing than its deep-discount offers.

There’s an excellent chance that you are a Groupon user, as am I. The company is said to have 70 million subscribers in 500 markets. If not, let me explain: Groupon sends an e-mail each morning with an offer from a local company, typically a service business like a restaurant or spa, for 50 per cent or more off the regular price of the company’s offerings. Groupon takes a significant chunk of the deal’s revenue for itself.

Considering Groupon was founded in 2008, its expansion has been nearly short of phenomenal, creating growth metrics that leave even tech veterans salivating.

It has also, unsurprisingly, created a wave of startups that ape its model, since the barriers to entry in this business are non-existent. Each day, I get e-mails from Groupon … and LivingSocial and DailyDeal.com, one from the local alternative paper, and one from Amazon. I am completely indifferent to the company sending me the e-mail: It’s the deal that matters. And I use Groupon’s deals no more than any other’s.

I’ve already fallen victim to one of the problems with using these deals: I let a Groupon – $10 for $20 worth of barbecue – expire. I had to talk the owner into giving me $10 off a $40 meal to recoup my loss.

And that’s when he told me he probably won’t use Groupon again. Nearly all the purchasers packed the place in the first week the deal was available and in the last week before the Groupon expired, he said, overwhelming the kitchen and creating a suboptimal dining experience. He didn’t sense they were coming back as full-price customers after getting their taste at a deep discount, he said.

But you don’t have to accept any of my anecdotal evidence on this. Let’s look at a couple of pro-Groupon arguments designed to counter this whole barrier-to-entry argument.

One is that Groupon has “first-mover advantage,” which is said to be exceptionally important in the tech space. I was going to use my Netscape browser to access the Excite search engine to research this concept more, then share what I found on Friendster, but decided to move on to the next point instead.

Another is that companies that stake out a leading position in the tech sector can easily accrue hugely scalable profits. But as Paul Kedrosky, a former technology analyst, notes, Groupon actually needs to hire salespeople to find the companies to offer the deals.

“They’re continually going to have to add people to grow and scale the business, and that looks more like Yellow Pages than salesforce.com,” Mr. Kedrosky said in an interview on Bloomberg Television. “It’s really very easy to see how suddenly you’re negative cash flow, suddenly the wheels come off, you’re not growing as quickly, and the valuation collapses.”

Any of the suggested Groupon valuations make the priciest of public tech companies look like value stocks. Depending on how you count the company’s revenues, a $25-billion valuation puts Groupon at something like 30 times trailing sales. Not earnings – sales.

Groupon rather famously rejected a Google buyout in December for a reported $6-billion and completed a round of financing in January that valued it at $4.75-billion, Bloomberg notes. To buy Groupon at $25-billion just a few months later requires believing Google was both badly wrong about its worth and is also no longer interested in the couponing opportunity and won’t start something itself. To say nothing of Facebook and its 500 million-plus loyal users.

Indeed, if Groupon indeed comes to market this year, it would be nice if it offered a 50-per-cent-off coupon on its own shares. But even then, you will likely be paying too much.

Editor's Note: An earlier online version of this article incorrectly stated the number of Groupon subscribers in the fourth paragraph. This has since been corrected.

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