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Groupon (NASDAQ:GRPN), the online group deal site, recently began trading on the NYSE, Friday November 4, amidst much hype and anticipation. Its shares originally priced at $20, shot up 40% to $28 at the start of the trading day, revitalizing the IPO market. But is there a real basis for Groupon’s relatively high stock price or is it all hot air?

We do think it is the later, as Groupon’s fundamentals do not look terribly promising for two reasons:

1. Groupon Is Overvalued

Investors should be extremely skeptical of the price of a stock that lost close to $420 million last year and $117 million in Q1 2011. The 40% up shot of the stock price upon its opening is unfounded and based off hype surrounding Groupon and recent internet IPOs of LinkedIn (NYSE:LNKD) and Pandora (NYSE:P), and older IPOs like (NASDAQ:AMZN) and Google (NASDAQ:GOOG). Groupon’s pre-market valuation of $13 billion is 30-times higher that of back in 1997 ($430 million), and more than half of that of Google in 2004 ($23 billion).

2. Groupon Is A Fad

Groupon is a glorified coupon company that features online group deals from a variety of different companies. But, ultimately, Groupon is just a middleman connecting potential customers to businesses. This leaves Groupon open to threats on both the costumer and business side of its operation. Many of the bargain hunters using Groupon are doing it out of hype; Groupon is the first to pioneer the online group discount. But, what happens when Groupon is no longer “in” - people grow bored of the group discount fad and move onto the next thing? Groupon will go the way of MySpace.

The business side of Groupon’s operation is perhaps the bigger threat. In addition to the steep discounts these businesses have to give Groupon bargain hunters, Groupon takes another chunk out of the pie. Merchants are making little to no money off these deals, so Groupon becomes more of a form of advertisement than a source of profits. In this case, what is to prevent businesses from cutting out the middleman and putting out their own deals?

Bottom Line

Groupon’s stock is already overvalued. The company doesn’t have a sustainable business model. This means that its stock valuation is all hype with no fundamental basis for its relatively high stock price. I wouldn’t want to own Groupon when the fad dissolves. I would look to invest in other stocks with less risk and better value.

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

Source: Why I'm Avoiding Groupon