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The Groupon Craze

I generally stay away from commenting on individual stocks or companies.  I have very little interest in making trades or bets that are dependent on the idiosyncratic risk of individual companies.  Due diligence can go a long way, but unless you have access to the firm’s officers, you might as well throw darts.  Besides, individual firms can lie.  There might not be any recently outlandish examples such as Worldcom or Enron, but just go read the press releases from Washington Mutual, Lehman Brothers, Bear Stearns, Merrill Lynch, and others before they fell.  Nothing but rainbows and sunshine.

When Google went public, I thought the craze was crazy.  We had seen dot com’s come and go or grab the headlines and then dim over time.  In the search engine space many were able to become the hot name of the week: AltaVista, Yahoo!, AOL Search, Lycos, Ask Jeeve’s, MSN Search, etc.  Search engines were a dime a dozen.  I always admitted that Google had a better product and I even used it for myself, but I never understood why everyone thought they would grow so quickly.  Google went public with a market cap of about $23B with $400M of net income as of year-end 2004.  Growth expectations were lofty, but at least they were making money.  Since then, Google has grown to become the 7th largest company in the S&P 500 with a market cap greater than Berkshire Hathaway and slightly smaller than Wal-mart at $196.9B.

I was wrong and the Google lovers were right.  They have perfected their web-advertising model, but they have also been aggressive in expanding their product offerings and becoming the guardian and holder of vast amount of user data.  Google knows who you are emailing, what you are reading, what sites you are visiting, what videos you are watching, and what you are buying…Google knows more about the average internet user than the user’s own spouse.  This is valuable information that they promise to never use against you, but for which they are paid handsomely in the advertising space.

In a similarly sized IPO, Groupon has gone public and traded as high as $31.14 or at a market capitalization of about $20B.  This would put them in the top 150 of the S&P 500 alongside names such as Yahoo!, Time Warner, Marathon Oil, Archer-Daniels Midland, Cummins etc…  The first way that this differs from Google is that the consultancy group Benchmark predicts that they will lose $280M in 2011 on revenue of $1.69B.

The second and most important way that Groupon differs from Google is that it must compete for each new market with only the benefit of its name recognition.  In other words, it does not matter if Groupon is the best group coupon provider in Chicago when it is trying to sell its services in Bangkok.  This is also why they are losing money even with significant revenue.

I was wrong when it came to Google’s growth trajectory, but (exclusive of a reverse stock split) I will be shocked if GRPN sees $31 ever again.

It will definitely be interesting to watch.

 

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6 Responses

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  1. Kirk Nathaniel says

    I agree – it’s valued virtually with it’s AMZN peer and has half the reach and product line base that AMZN does. Great analysis of this clearly media driven IPO

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