November 4, 2011, 10:03 AM

Groupon’s IPO has the highest U.S. tech company valuation since Google

The daily deal operator’s offering values the company at $12.67 billion.

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Daily deal operator Groupon Inc. has begun trading today at a price of $20 a share, 25% higher than the low end of the $16 to $18 range the company noted in a U.S. Securities Exchange and Commission filing in October. That pricing values the company at $12.67 billion. At the close of trading shares were trading at $26.11, up more than 30%.

Groupon’s initial pricing values the company at $12.67 billion. That’s the highest valuation for a U.S. technology company since Google Inc. went public in 2004, with a valuation of $23.1 billion. Groupon's valuation is also higher than established companies like Xerox Corp.

With 35 million shares available, 5 million more than the company initially planned to offer, Groupon will be able to raise roughly $700 million. The company is selling only about 5.7% of its shares, a small number that experts say is aimed at inflating the price of the stock by limiting the supply available to investors. However, after the initial rush, the small number of shares available makes it likely that more shares will appear on the market in the next few years, which could make it difficult for IPO investors looking to hold their shares to derive a profit from their investment.

But holding their shares for a long period is not something many investors are likely to do today, says Greg Sterling, founder of Sterling Market Intelligence. “I think the shares will be turned over several times today,” he says. “Some may be thinking of the longer term but that remains a wait and see game.”

That's because Groupon is not profitable. While the daily deal operator’s third quarter revenue increased 426% to $430.1 million from $81.8 million in the same quarter last year, it still posted a $10.6 million net loss. That’s troubling to analysts like Jim Krapfel, an IPO strategist at Morningstar.

"There is a level of spending that Groupon has to maintain in order to maintain subscribers," he says. "We've seen when their marketing ceases to flow, their growth rate slows down significantly. If they continue along the track of keeping marketing costs down, it may lead to some profitability, but at the expense of their growth. So we think they might plateau." 

Another element that may eat into Groupon's growth potential is merchants demanding a higher take from deal, particularly as large competitors like Google push harder into the space. "That's the natural evolution of the model," says Krapfel. Groupon typically takes about half of the revenue generated from the sale of its daily offers.

Morningstar estimates that for every 5% lower take rate that Groupon receives, the company's long-term profit opportunity is cut in half. "That number is pretty startling," says Krapfel. "But their take rate is a big driver of their growth."

While Groupon’s road show promoting the offering has bolstered the value of its shares, that value is still lower than the $750 million and $15 billion valuation the company sought when it initially filed paperwork announcing its IPO plans in June. But since June the daily deal operator has faced a rocky road as its filings have faced scrutiny over its large marketing expenses, unusual accounting practices, as well as its reported revenue that has led it to amend its S.E.C. documents several times. Throughout the process, the company also lost its chief operating officer and a top communications executive. was recognized as an innovative e-retailer on the 2011 Internet Retailer Hot 100 list.

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