Why Groupon Is The Next Google

| About: Groupon, Inc. (GRPN)

There has been a lot of speculation about Groupon's (NASDAQ:GRPN) much anticipated IPO. Groupon has been getting a lot of negative press and analysts have even begun to question Groupon's viability as a business.

What interests me about this situation, is all the negative news that is being brought up by analysts. Analysts have concerns regarding Groupon's losses. Groupon has always invested heavily in customer acquisition and marketing. In fact Groupon has incurred net losses since its inception. Groupon spent over $179 million in the first quarter of 2011 on online marketing. This investment caused Groupon to lose $102 million in the first quarter of 2011. As the IPO draws closer many on Wall Street are now worried about Groupon's future.

I have a contrarian view to this belief. This could be a great opportunity to invest in a fast growing company that could be a dominant force in the advertising industry. I understand that Groupon has lost money since inception, but if you put their growth in perspective, I can understand why.

Here are highlights to Groupon's growth:

- Revenue increased from $3.3 million in the second quarter of 2009 to $644 million in the first quarter of 2011.

- Groupon expanded from 5 North American markets in June 2009 to 175 North American markets and 43 countries as of March 2011.

- Subscriber base increased from 152,000 in June 2009 to 83 million in March 2011.

- The number of merchants in Groupon's featured marketplace increased from 212 in the second quarter of 2009 to 56,781 in the first quarter of 2011.

I would find it impossible to achieve this type of growth organically without making a significant investment in the business. The mistake made by Wall Street, is the belief that this investment in marketing is required by the company. Groupon doesn't need to make this investment in order to stay in business, they do it for strategic purposes.

Many analysts believe that Groupon's losses are evidence that their business model doesn't work. This is way over-exaggerated and is not even close to what Groupon is trying to do.

Groupon is trying to play on their first mover advantage. Being the daily discount leader, many merchants and customers are flocking to Groupon. By quickly expanding into new markets they can look to maintain that advantage.

I view Groupon as the new up and coming Google (NASDAQ:GOOG). Now this might sound like a bold statement, but I'm strictly talking about Google's search advertising business. We all know that Google is the dominant player in the search advertising market. Google revolutionized the way small businesses were able to compete in the large internet marketplace against much larger competitors. Many viewed Google as the company that leveled the playing field for smaller retailers.

Groupon is doing the same thing but they are going after a different set of customers. Groupon is allowing brick and mortar businesses a chance to now compete with larger competitors. Groupon allows small businesses a chance to advertise to a larger audience on a small budget.

Groupon is one of the few internet businesses that are actually generating big revenue growth. Groupon is also involved in almost every industry indirectly through the sale of their Groupons. I like how this creates a steady stream of revenue for Groupon compared to traditional online advertising. Groupon is basically pre-selling products and services that consumers have to purchase in order for Groupon to make money. The best part is Groupon doesn't have any cost of goods on those products and services.

Groupon could actually benefit further from an economic slowdown compared to online advertising which could suffer. Since merchants don't have an upfront cost, many merchants are willing to run Groupon specials to generate more business during economic slowdowns. There are also more customers looking for deals which will accelerate their sales.

How does this compare to the traditional method of online advertising? Merchants don't have to pay up front in order to participate in Groupon's program. Groupon just deducts their share of the sales and forwards the balance to the merchant. In search advertising or banner advertising, the merchant would have to come up with the investment up front with no guarantee that their advertising campaign will work.

Regarding Groupon's profitability, Groupon can minimize their marketing expenses at any time. I feel they don't need to continually invest such a large amount in their marketing if they don't want to. Groupon has a large customer and merchant base which could be used to continuously generate business. This customer base will continue to grow even if Groupon were to cut a large part of their advertising budget. Groupon could turn profitable today if they wanted to but they would be sacrificing growth.

A lot of what Groupon is doing has to do with their strategic advantage. Groupon's business is a lot harder to duplicate than many analysts are giving them credit for. After all, there are many options in search advertising but many businesses still prefer to use Google. Why is that? It's mainly because Google has the customer base and traffic that merchants want. Groupon has that same advantage with their 83 million subscriber base.

I like Groupon and believe in their future. I feel that we could see some really big things in the future and once Wall Street realizes that, early investors will be sitting pretty. I'm hoping for a sell-off in Groupon once they go IPO. I will view a sell-off as an opportunity to build a long term position at a good price. I rarely invest in IPOs as a long term investment, but if I get my price I will definitely pull that trigger.

If you want to read the prospectus you can find it here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.