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Old 11-05-2011, 03:22 PM   Nav to Top  #1
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Bomb Analyzing the Groupon IPO

Groupon's IPO yesterday was an overall success since it both priced higher than expected by 25% and then added another 30% to its $20 offer price. For most IPO's this would have been a 1-2 punch that any board of directors would do backflips over. I am sure Groupon's did the same, but I spent some time last night evealuating the company a bit more after I wrote my article last night how I was not comfortable with my understanding of the company or its business model to decide to trade it. About 4 hours and two glasses of a beautiful Napa County Cabernet, I felt I had a better grasp on the overall company's business model and its strengths and weeknesses.

The company provides a great service and has a bunch of highly talented individuals working for them. Groupon goes out and has found a way of penetrating the small and medium sized businesses for advertising money. Groupon advertises for companies and gives deep coupon discounts to users if enough people will sign up. Take for example a restaurant uses Groupon for advertising and getting traffic in the door. Groupon will advertise a $100 voucher for $50 if 100 people sign up. Basically the restaurant is going into this knowing it is going to take a big hit but if half of those 100 people come back the company can see an ROI on its investment. Groupon on the other hand pockets $25 of the $50 and gives the other half to the merchants. Either way Groupon has the best end of the bargain.

Now even with this the company had $1.12 Billion in revenues through the first 3 quarters of 2011 but was not profitable yet. This is the first red flag that is thrown up after the Groupon IPO. For some reason I thought they were making money and it turns out they are not. Many start up companies have many years before they reach their break even point to start to gain scalability and a profit, but it normally comes way before the billion dollar revenue target. This demonstrates that its young confident management team might need to take a step back and understand that running a successful business means much more than marketing and sales.

Groupon IPO vs Google IPO
Now I do remember Google's IPO very well and I remember how much the company and its leadership jumped out at me. I liked everything about them. They were young, confident, and seemed to have a business savvy that was therapeutic. All the talk was on how much money Google spent on facilities, food, massages, volleyball courts, and all other non business critical expenses. The Groupon IPO revealed the majority of its massive costs were associated with its gigantic operating expenses as it has a huge sales team that pushes these deals around the 300 major markets it is in. The Groupon IPO showed the company took a loss of over $300 million for that same three quarters of 2011 on over a billion in sales. That is a big loss to take on that large of a revenue number! In contrast, Google, which had a similar revenue number on its year of its IPO actually made over 135 million in profits that same year. There is a big difference between making $135 million and losing over $300 million. Hopefully the company will get better at operations as it matures but if it does not this company could have seen its glory days already.

Groupon IPO vs LinkedIn IPO
Now I personally feel that the Groupon IPO is going to act much more like the LinkedIn one did. It has a similar struggle with making money. It is however turning a slight profit which is better than Groupon at this moment. LinkedIn was the talk of Wall Street before its IPO. It rocketed after its IPO to over 120 a share but quickly dropped back down to the $60's and now trades at $82. I feel Groupon is going to have a similar trading strategy with a bunch of volatility. This volatility is going to make traders that are better than me a ton of money with many double digit percentage daily swings. However, this is something that I would stay away from. After analyzing the company, I am glad I stayed away from purchasing after the Groupon IPO, but I feel it could be a good short trade in the near term.

If you want to trade tech right now, I still feel there are many better places that make money and have solid fundmentals that will allow you to sleep a bit better at night. Anything dealing with mobile internet and smartphones to the cloud to enterprise software are all solid places to put money to work. Names like Google, Apple, Akamai, F5, EMC, VMW, Qualcomm, Cirrus Logic, Ciena, and many more are all better plays than the Groupon IPO right now!

Have a great weekend,

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