10 Nov 2011

Gauging Groupon’s Public Offering


BOSTON—Groupon's initial public offering made a big splash in the stock market last Friday, but according to Robert Wheeler, a Fellow at Harvard Business School's Forum for Growth and Innovation, how investors value the stock in the long term is a more important test for this and other IPOs.

Robert Wheeler (@Robert Wheeler27) is a Fellow at Harvard Business School's Forum for Growth and Innovation. He earned an MBA from Harvard last year with high distinction as a Baker Scholar. Prior to HBS, he served as an officer in the US Army.

Last Friday, Groupon's stock finished its first day of trading in the public markets up nearly 31% from its offering price of $20 per share. The company raised nearly $700 million to fund operations, and demand for the initial public offering (IPO) significantly outstripped supply by nearly a 10-to-1 margin. The IPO even priced above the $16-18 per share range that Groupon itself was targeting, enticing the company to float more shares than it had initially planned.

All in all, I'd say Groupon, which didn't even exist three years ago, must have been pretty pleased with its first day as a public company.

The road to this point has not been easy, however. Many merchants — the people who pay Groupon to run its deals — have been disappointed with the results of their interactions with the company. Customers either don't show up at all or come just once. And in light of fierce competition and customer fatigue, many market observers have openly questioned the sustainability of Groupon's business model, which has been extensively imitated by others, including heavy-hitter Amazon. Despite these problems, the public markets valued Groupon at just under $16 billion – more than double the reported $6 billion that Google offered for the company less than a year ago.

At first blush, therefore, it would appear that Groupon's strong IPO performance settled the debate.

But I think some serious questions remain. Fundamentally, Groupon's business model has yet to be proven. Its traditional daily deals business is looking less and less appealing at scale as we learn more and more about what the economics of the market look like at maturity. The company is experimenting with numerous other products such as Groupon Now instant deals, Groupon Getaways travel deals, and Groupon Goods deals on merchandise to extend and sustain the business.

But the absence of entry barriers, the feverish competition, and uncertainty regarding the ultimate success of any of Groupon's initiatives give me pause.

The company's stock performance last Friday is not what potential investors in the company should be considering as they make their buy or sell decisions. Rather, they should be evaluating whether Groupon has the potential to be a $16 billion company when trading closes this Friday, next Friday, or on any given Friday a year or a decade from now.

When things get bubbly, it is important for us to remember that this is the ultimate litmus test for this or any other IPO.

About Harvard Business School

Founded in 1908 as part of Harvard University, Harvard Business School is located on a 40-acre campus in Boston. Its faculty of more than 250 offers full-time programs leading to the MBA and PhD degrees, as well as more than 175 Executive Education programs, and Harvard Business School Online, the School’s digital learning platform. For more than a century, faculty have drawn on their research, their experience in working with organizations worldwide, and their passion for teaching, to educate leaders who make a difference in the world. The School and its curriculum attract the boldest thinkers and the most collaborative learners who will go on to shape the practice of business and entrepreneurship around the globe.