Why The Groupon IPO Will Be A Success

| About: Groupon, Inc. (GRPN)

In over a decade of following the IPO market, never before have I seen such negative press over a high profile deal. There have been hundreds if not thousands of articles written about the Groupon IPO (many of which just re-iterate the same information), and why this particular deal would be bad for investors. It is like the press is writing about Tim Tebow’s inevitable demise without any reference to the millions of Tebow worshippers (and yes I am Tebowing as I write this). Well, let’s keep the negatives aside and talk about the other side of the Groupon IPO and why it will work.

But before I go into the 5 reasons of why this IPO will work, let me first say that I am familiar (many times over) with all of the risks and arguments associated with the offering. I know that they had to restate their financials to appease the SEC. I know they have had two COOs leave in the last year. I know there are little to no barriers-to-entry and they face a lot of competition. And I know the company is not yet profitable. So please don’t send me all of the arguments that have already been stated many times over. I am here to tell you I know and I don’t care, because the IPO is going to work.

1) Market Leader: Groupon is the leader in the e-commerce marketplace for discounted daily deals. While there have been hundreds of new entrants into this market, not to mention powerhouses such as Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) eyeing this space, Groupon is 5x larger than the nearest competitor, Living Social. Economies of scale clearly play a role in this category, and it can be readily argued that Groupon owns this space as far as economies of scale are concerned. Groupon leads in 35 of the 45 international markets it serves.

2) Growth: Groupon has experienced revenue growth that is unmatched in recent history - from a negligible $5k in 2008 to over $1.1 billion in the first 9 months of 2011. While many critics are quick to point out that the growth is slowing, I would quickly counter that it is nearly impossible to continue the same growth trajectory once a company reaches the scale of Groupon. In the just-concluded quarter (Q3 2011), Groupon achieved 9.6% sequential revenue growth, 23.4% sequential subscriber growth, 27.8% cumulative customer growth, 32.9% cumulative repeat customer growth, 7% growth in average revenue per customer and 1.5% growth in the number of groupons sold.

3) Funds need to own this stock: While there has been a lot of press quoting investment professionals that say the valuation is still too high at an approximately $10.8 billion market cap, many investment funds simply need to own this stock. Though the company is not necessarily a social media company, it has been connected with the likes of LinkedIn, and there simply are not enough public companies currently in the space. Moreover, it will be hard for tech and growth funds not to own the stock if it does a LinkedIn (NYSE:LNKD), or even an Amazon for that matter.

4) The underwriters need this IPO to work: The IPO market has been in the doldrums in the past few months due to the market volatility primarily resulting from the European crisis and recessionary conditions prevailing in the U.S. Many deals in the pipeline have been put on hold until there is some clarity within the IPO market. An unsuccessful offering of Groupon's magnitude would definitely not help to jump-start the IPO market. And let's not forget the bankers want to make their year-end bonuses. It is then not surprising that the float of the offering was substantially reduced from previous expectations. A successful offering combined with some solid reported earnings in the coming quarters will go a long way in ensuring the ability to follow up with a secondary offering. The secondary offering would allow the existing holders to sell a portion of their stock in about 6 months.

5) Demand: The offering is said to be well oversubscribed and the books closed a day early for the offering. There is also the expectation that the stock will price at $1 to $2 over the indicated range. All of these indicate a strong offering and thus a strong first day performance for the stock. Since the beginning of 2008, there have been 61 IPOs that have priced above the indicated range, and all but one of these deals opened up on day one (the only exception was Metals USA in April 2010), and all but 2 closed higher on the first day (Metals USA (NYSE:MUSA) closed down and Skullcandy (NASDAQ:SKUL) which priced July 2011 closed flat). The average day one gain for these deals was 36%.

I am not trying to portend that an investment in Groupon will work in the long term. Of the 29 IPOs to price above the range so far in 2011, only 16 or 55% are currently above their IPO price. However, with over 96% of the IPOs since 2008 closing positive on day one, I would be willing to bet my autographed number 15 jersey that the Groupon IPO will surely be a success on the debut.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GRPN over the next 72 hours.