Groupon Might Turn Out To Be A Great Investment After All

| About: Groupon, Inc. (GRPN)

It’s difficult to evaluate private companies even when they trade on secondary markets such as is the case for Facebook, Groupon and many others. The company founded by Andrew Mason was hyped up for a few months. After declining a $6 billion offer from Google, the company announced its plans to become public but things have been far less positive since then. After news leaked that Groupon was considering turning public at a $20 billion valuation, many analysts did their homework and found that such a price would have been an exaggeration. Why?

-The company is not that profitable: Doubtful accounting methods made Groupon’s financials look much better than they really were by amortizing marketing costs over time.

-Founders Selling Out: One of the big surprises that came out of Groupon’s initial filing papers is how much stock the founders and early employees have already sold. Do they think the company is at its top? Maybe not, but it certainly does not reflect too well either.

-Competition Is Fierce: Not only is LivingSocial (part owned by Amazon) a major competitor but other big players like Facebook and Google quickly moved into the daily deals. Add local players as well as niche specific ones (Travelzoo in travel for example) and you can certainly see why margins are down big time.

-Benefits To Merchants Questioned: The daily deal business can only work in the long term if merchants are also winners and it’s unclear if that is really the case. Why? The daily deal searchers are not necessarily coming back, not spending as much and the

-Bubble Talk: When the media and analysts discuss the possibility of us being in a bubble, examples such as Facebook and Groupon are mong the first ones to be mentioned

All Of That Being Said

I personally am happy to see the hype come down, which might provide some opportunities. In the short term, Groupon has delayed its IPO and will certainly wait for a more favorable context to go public. I think the future is still bright for Groupon. Why?

-Competition Will Calm Down: I do think that LivingSocial is there to stay but seeing Facebook pull out and Google struggle to some extent certainly shows how difficult of a business this is. The daily deal business requires a lot of well trained employees and Groupon has done a good job building that network. In fact, according to recent reports, Groupon had a great month of August while competitors struggled.

-Strong Brand: One thing that Groupon did incredibly well was to gain market share almost everywhere in the world, very quickly making it very difficult to compete with, Groupon which has a name associated with credibility. The challenge will be offering a good service to merchants and consumers through all of those local branches but I personally do think Groupon will come out on top.

-Pressure Is On: Founders and executives at Groupon have put a lot of pressure on themselves with some already discussing the possibility of replacing Andrew Mason. I do not see it happening but I do imagine that will highly motivate Groupon to show they are doing things right.

-Groupon’s Growth Was Done Right: In June 2009, Groupon had 37 employees and 2 years later it is approaching 10,000! Impressive growth but was it too much, too fast? I don’t think so. Anything less than spectacular growth to become a major relevant player around the world would have made it rather easy for global companies such as Google and Facebook to take control of the daily deals space.

In The End, It’s All About Valuations

Like every other investment, it will end up being about how much Groupon ends up going for and how much that ends up representing in terms of revenues and profit multiplies. I am certainly hoping the IPO occurs soon!