Groupon's IPO: Amid company instability, should investors buy?

Summary:Groupon's initial public offering is set for Friday. But how willing should investors be to buy?

Chicago-based company Groupon is teetering on the edge of public trading. The popular daily deals site is to price its IPO after markets close later today, to officially begin trading on Friday morning.

In less than two years, Groupon has gone from the darling of Forbes magazine as "The Fastest Growing Company Ever", to a company where regulators criticise their accounts, profit margins are revised, while accounting methods are called into question and top executives keep jumping ship.

After critics and regulators hammered at the company's business model, Groupon were pressured into re-filing their accounts in August. Consequentially, operational profit cited within the first filing became operational losses. Another error correction later, and Groupon's sales were sliced in half; from the $1.5 billion it had previously claimed to a mere $688 million.

The company is placing 30 million shares up for sale, hoping they will receive between $16 and $18 a piece. Groupon would therefore be valued between $10.1 and $11.4 billion.

Considering this curious history: how willing should investors be to buy?

Groupon's IPO is already said to be 'oversubscribed', which in itself has no true reflection on the worth of the shares. Initial public offerings are almost always in demand over availability -- if they were not, the stocks would plummet in the moment of entry to the marketplace.

The true question is how oversubscribed the shares are in relation to price flexibility and legitimate demand. With high estimates used to drum up interest, it is yet to be seen how these shares will fare after the first rush to buy.

With several analysts mulling over the idea of there being any demand for Groupon shares at all, the consensus appears that Groupon should trade at $5-$10 billion; a lower forecast that Groupon hopes to achieve. With recent figures appearing that suggest Groupon may be working towards a future 30 percent operating profit margin, for a company that is continually losing money, these figures seem aggressively high and difficult to validate.

Alternative figures, such as those published earlier this week by analyst Ken Sena, predict a loss of $1 a share in the following fiscal year, rather than the publicised increase of $1 per share.

Anthony Catanach, accounting professor at Villanova University, said investors need to be wary of any new offerings from Internet companies if their stocks surge on the first day.

"In the '90's we saw these [accounting] concerns put to the side", he said. "There were countless people saying this doesn't make sense, but investors still bought. And look what happened."

The performance of Groupon's IPO may be a good indication of how willing investors are to buy risky companies. Zynga will be up to the stage next, having filed in June it is expected to start trading later this month.

The message? The first day of new offerings by companies like Groupon in the marketplace may not be any indication of their long-term profitability, especially when the company in question has something of an unstable past.

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Topics: Banking, Legal

About

Zack Whittaker writes for ZDNet, CNET, and CBS News. He is based in New York City.

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