Friday, November 04, 2011

The Groupon IPO

Groupon's IPO, according to this morning's Wall Street Journal, will raise $13B. The article emphasized Groupon's own attempt to liken itself to Amazon, even to the extent of claiming it is a sort of Amazon 2.0.

Groupon has recruited several former senior-level Amazon executives.

For perspective, nearby is a chart depicting the prices for Amazon's equity and the S&P500 Index from Amazon's public inception.

Yes, in theory, one would have enjoyed an enormous return if one had bought Amazon at its public offering and simply held it. But 2000-2002 was a time of steep downdraft for the firm's equity price.

Amazon took a long time to become profitable. It's operation involves substantial physical logistics, as well as inter-related information systems with its many suppliers and customers. In time, all these became barriers to entry, resulting in the firm becoming a one of a kind entity.

In contrast, Groupon is a fairly simple operation. The Journal article mentions how Groupon's founder entertained investment from, then a venture with Amazon, but ultimately chose not to pursue either. Jeff Bezos subsequently backed a competitor to Groupon.

This morning, on CNBC, Melissa Lee noted that Groupon's revenue per customer transaction has declined from over $5 several years ago to, most recently, just over $1. Certainly, the immense publicity regarding the firm's service has declined from its faddish popularity only a few months ago.

To date, after having subscribed to the service back then, I've never actually spent a dime on or with the service. Contrary to its self-described position as the new way the world will buy products, I am hard-pressed to find anything among the offers emailed to me daily for which I'd spend money.

As I explained in a prior post, Groupon presents quirky deals which typically don't fit with my own lifestyle or needs. The Journal has run several articles in the past detailing the problems merchants have with one-time buyers from the service, as well as some sharp-penciled competitors offering better revenue splits.

If the Groupon method of selling/buying takes hold, it's got plenty of competition. If not, it was just a flash in the pan.

In short, Groupon's barriers to entry are far lower than Amazon's, making it seem much less like a near-clone of the now-dominant online seller. It's difficult to dismiss Groupon's IPO as having a very 'party like it's 1999' feel to it. That is,  high point before a downdraft reminiscent of the 2000 technology equity bubble deflation.

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