After months of scrupulous examination underneath the financial media's microscope, Groupon's time has finally come. Groupon expects to go public this week by listing shares on the Nasdaq in what very well could be the most heavily publicized new issue of 2011. Groupon, the operator of the well-known group buying website, plans to offer 30 million shares at a range of $16 to $18 per share in a deal that would value the company at more than $11.2 billion. Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS) are the lead book runners on the offering.
Groupon operates the leading group buying site for consumers to purchase goods and services at 50-90% discounts from local merchants in 175 North American markets and 43 countries. It has collected 143 million subscribers who receive daily emails that offer deals called "Groupons." A typical Groupon might sell for $20 and be redeemable for $40 of food at a restaurant. The company passes the majority of the Groupon purchase price to the merchant and retains 30-40% as revenue. Groupon's emergence in the local deals market has given it the ability to become a major purchasing platform and leverage its user base to offer new products and services, including travel (Groupon Getaways), events and concerts (Groupon Live), and consumer products (Groupon Goods). It has also introduced Groupon NOW, which allows merchants to instantly offer discounts that can be viewed on subscribers' mobile phones to drive business during slower hours.
Groupon has grown extremely rapidly and generated $1.2 billion in revenue in the third quarter. Although it has been unprofitable since inception, it reached breakeven in the quarter thanks to a sharp reduction in marketing expenses. However, growth slowed noticeably, with 3Q sequential revenue growth of 10%, down from 33% in 2Q. The slowdown was seen most acutely in the number of Groupons sold, which was virtually flat from the 2Q to the 3Q. The company's revenue growth was driven by a mix shift to higher-value Groupons.
Regardless of the rapid growth Groupon has used to infatuate potential investors, the company still has yet to turn a profit. Future earnings will largely depend on Groupon?s ability to reduce marketing expenses effectively while maintaining customer growth. Additionally, it must withstand rapidly increasing competition in the space, including from large companies such as Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN). Most importantly, for Groupon to keep its position as a leader in the local deals market, the company must not lose focus on recruiting local merchants and continue offering subscribers the quality deals that made the company famous.
While it has become difficult in recent weeks to separate facts from opinions as media coverage continues, the fact is that the concerns and praises for Groupon are both valid. The company offers investors a new business model in an emerging market and impressive growth. However Groupon still faces significant concerns about expense management and its ability to continue customer development. With shares sold in the IPO representing only 5% of the company's shares outstanding, the stock could trade up after listing because of this favorable supply and demand dynamic. However, the Groupon's long term success ultimately hinges on the economics of the model which remain unproven.