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Groupon Grows Up

Deals startup expected to open trading at $16 to $18 a share
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Three years ago, Groupon was just the latest Internet gamble of a goofy CEO. But on Friday, the super-hyped, sometimes silly, social commerce start-up is expected to graduate to the big leagues.

If all goes according to plan, Groupon will price its shares after the markets close today and start trading on the Nasdaq Friday, under the ticker symbol GRPN. At the expected $16 to $18 a share, the company would be valued between $10.1 billion and $11.4 billion.

But in the months leading up to this highly-anticipated public debut, the company has come under fire for accounting quirks, executive departures and business model weaknesses. In the weeks since it filed its most recent documents with the SEC, the company has taken even more hits.

While some reports this week indicate that the company could price its IPO $1 to $2 above its current range because of outsized demand, some analysts have challenged even its current valuation.

Based on his projections, Ken Sena, an analyst with Evercore Partners, values Groupon between $8 billion and $10 billion.

He sees an opportunity for Groupon as a local commerce platform of scale if it can minimize its sales force, boost its self-service efforts and leverage its leadership position in the daily deals business. But, in a note to potential investors, Sena said the company faces a growing band of rivals and signs of deal fatigue among merchants and consumers.

Citing daily deal aggregator Yipit, he said about 46 percent of first-time merchants return to Groupon. Sena also said that he is observing lower billings and revenues per subscriber. On average, subscriber spending is flat year over year and about half of what is was two years ago.

“We estimate net revenue growth of 19 percent on a sustained growth rate over the next five years, well below the explosive net revenue growth Groupon has demonstrated to date, as we anticipate lower-take revenues from its newer platform initiatives, such as Groupon Now! and Groupon Goods, in addition to waning core performance,” Sena said.

Other analysts value the company even lower.

In a report about Groupon, Morningstar analyst Rick Summer said, “We don't believe that this Daily Deal, scheduled to price Nov. 3, is enticing enough for investors to buy.”

Pricing the company at $8 a share, he said it’s worth $5 billion dollars—just about half of what its IPO price reflects.

While the company has reported “stratospheric” revenue gains (Summer projects sales to increase more than five-fold to nearly $2 billion in 2011), expenses continue to outpace revenue.

Summer also argues that the business can be easily copied.

“Although Groupon has incredible brand recognition, it's not clear to us why merchants would avoid using the competition, particularly if they receive other services or better terms,” he said.

Still, that doesn’t mean shares in the company won’t get a LinkedIn-like first-day bump.

A.B. Mendez, an analyst with GreenCrest Capital said that despite the negative stories about the company (some of which make good points, he added), Groupon’s stock could trade upwards 30 to 50 percent on IPO day.

Pointing to LinkedIn and Pandora, two tech companies that went public this year and quickly traded above their opening prices, he said, there’s more demand than supply of social media and social commerce stocks.

It’s always difficult to predict but, he said, “I’d be surprised if it didn’t have a meaningful pop on the open … I think it’ll finish up substantially above the IPO price.”