Groupon is better positioned than any company in history to reshape local commerce. We have yet to reach sustained profitability and we have no shortage of competition. Our path will include some moments of brilliance and others of sheer stupidity. 

— Andrew Mason, Groupon CEO

(page 34 of IPO registration statement) 

Groupon (NasdaqGS: GRPN), the daily-deal website that reached $1 billion in sales faster than any other company in history, finally went public on Friday (Nov. 4^th). Its IPO priced at $20 per share, above the expected range of $16-$18 because of strong investor demand. The stock started trading at 10:45 AM at an opening price of $28 and rose as high as $31.14 four minutes later at 10:49 AM. The stock settled back by the end of the day to close at $26.11, which still constitutes a 31% gain from its IPO price and a $16.5 billion valuation.

Not bad, especially compared to the measly $6 billion Google (NasdaqGS: GOOG) offered to buy the company for in November 2010. On the other hand, a 31% pop is certainly nothing like the 109% first-day gain experienced by professional networking website LinkedIn (NasdaqGS: LNKD) when its IPO went public on May 19^th.

I hated the LinkedIn IPO and recommended that investors steer clear of the stock, which at the time was trading around $102. With LinkedIn currently trading at $82.50 – 19% lower – my cautionary statements have proven justified. I didn’t like LinkedIn because it was trading at an extraordinarily high price-to-earnings (P/E) ratio of 594 and had artificially boosted the stock’s value by creating supply scarcity – only 8.3% of the company’s shares outstanding were offered in the IPO.

Groupon is a Money Loser

All of the reasons I disliked the LinkedIn IPO also apply to the Groupon IPO. In fact, I hate the Groupon IPO even more! Unlike LinkedIn, Groupon isn’t even profitable. Take a look at page 7 of Groupon’s registration statement. The company’s short 3-plus-year history shows losses in every pro-forma reporting period and the losses are accelerating:

Groupon’s Losses

Does that look like a strong business to you? I didn’t think so. Yes, Groupon’s revenues have grown fast, but growth that used to be 100% sequential on a quarterly basis has slowed considerably down to only 10% sequential. Operating costs are also growing fast and the company’s total costs are greater than its total revenues. The more Groupon grows, the more money it loses. It reminds me of the old joke: “What I lose on each sale I will make up in volume!”

Groupon likes to point out that Amazon.com (NasdaqGS: AMZN) was also unprofitable at the time it went public. Hah! Based on that “logic,” every money-losing company is the next Amazon. Amazon was the exception, not the rule. Amazon built a best-in-class Internet customer fulfillment infrastructure and cloud-computing back-office functionality that is tough to duplicate. In contrast, Groupon sends out emails offering discounts. Anyone can send out emails.

Groupon Faces Intense Competition with No Barriers to Entry

Groupon faces over a hundred competitors, each one doing the exact same thing Groupon is doing. Yes, Groupon was the first mover in the daily-deal space and currently is the largest provider with around a 53% market share, but without a sustainable competitive advantage its large market share will erode very quickly. Although Facebook tried and failed in the daily-deal space, several large and well-financed daily-deal competitors remain:

• LivingSocial
• AmazonLocal
• Google Offers
• Tippr
• The Capitol Deal (Washington Post)
• Woot (Amazon)
• Gilt City

Groupon’s Small IPO Float is a Red Flag Warning

Groupon’s IPO is only floating 6.3% of the company’s shares outstanding, which is less than the 8.3% float issued by LinkedIn or even the 7.2% float issued by Google in its August 2004 IPO. In fact, Groupon’s IPO constitutes the lowest percentage of shares offered by any U.S. Internet company in the past decade and the fourth-lowest percentage since 1995. The three companies with lower IPO percentages were Palm (4.7%), Portal Software (6.2%), and Ciena (NasdaqGS: CIEN) (6.2%).

Palm’s 2000 IPO gave it a first-day valuation of $53 billion, but sold itself ten years later to Hewlett-Packard (NYSE: HPQ) for only $1.2 billion, a 98% decline. Portal Software’s 1999 IPO gave it a first-day valuation of $1 billion, but sold itself to Oracle (NasdaqGS: ORCL) seven years later for only $220 million, a 78% decline. Ciena’s 1997 IPO gave it a first-day valuation of $3.4 billion, but its current valuation is only $1.3 billion, a 62% decline. Equity dilution over the years has made the per-share valuation decline an even worse 90%.

Do you see a pattern here? I hope so. Companies that utilize IPO trickery (like share scarcity) to prop up their stock price are probably doing so because their stock doesn’t deserve a high valuation otherwise. Groupon’s stock will probably follow the same path down experienced by the companies described above.

Timeline of Groupon IPO Problems

I also don’t like the behavior of Groupon’s management team in the months leading up to today’s IPO:

June 2, 2011: Groupon announces plan for IPO

June 3, 2011: Groupon Chairman Eric Lefkofsky tells Bloomberg that the company will be “wildly profitable,” which violates SEC disclosure rules.

August 5, 2011: The Securities and Exchange Commission (SEC) requires Groupon to re-file its registration statement with financial data based on GAAP, rather than the non-GAAP “adjusted consolidated segment operating income” (ACSOI) metric that understated operating losses by $120 million.

August 25, 2011: Groupon CEO Andrew Mason sends an email to employees countering critics’ accusations that the company is running out of money.

September 6, 2011: Groupon delays its IPO after the SEC tells CEO Mason that his email to employees violated disclosure rules.

September 23, 2011: The SEC requires Groupon to re-file its registration statement again and reduce its 2010 revenues by $400 million to reflect only net revenues and not revenues paid out to vendors. The registration statement (page 28) tells investors that they “should not rely” on the June 3^rd statement by chairman Lefkofsky nor the August 25^th email by CEO Mason.

September 23, 2011: Groupon COO Margo Georgiadis leaves the company, the second COO to leave Groupon in the past six months.

November 1, 2011: Two accounting professors question Groupon’s accounting, asking the rhetorical question:

Why are Groupon investors in such a hurry to cash out? What’s the rush? Is there something lurking behind the scenes of which we are unaware?

Investors Should Avoid Groupon’s Stock

As Groupon CEO Andrew Mason states in the introductory quotation at the beginning of this article, the company will inevitably engage in some acts of “sheer stupidity” during its lifetime. I suggest investors who buy the stock now — after its first-day 31% price gain — would be guilty of the same.