11/4/2011
By David Urani, Research Analyst

If you needed any more proof that we live in an internet-crazed age, look no further than today's IPO of Groupon (GRPN). If you're not familiar with it, in a nutshell it offers daily coupons for group discounts at local businesses near you. Today's deal in New York is a $39 meal for two at a fancy French restaurant. Needless to say, it got really popular really fast and now it's one of the hottest IPO's of 2011. The IPO was initially priced with a market cap of a little over $12 billion, and initial trading has the stock up about 40%, so that gives it a market value of about $17 billion as I write this.

I am part of the tech generation, and I regularly watch my friends and peers get way too excited about cellphones, Facebook and the like. In a way, you might call me techno-phobic. Nevertheless, I am probably an outlier these days and the market, like most people, certainly goes into a frenzy when a hot new tech fad comes around. Perhaps I am biased against internet fads, but I like to think I am seeing things from all angles and at this price, I think Groupon is grossly overvalued.

Sure, Groupon is super popular right now, but the way I see it there is nothing groundbreaking there. I don't know the intricacies of its daily operations, but from the outside it looks to me like running its daily deals takes little more than a phone call to local businesses to set up a discount deal. In that sense, it looks easy to replicate.

Not only that, but the hype already seems to be wearing off for Groupon. The Company has slowed from 111% revenue growth in late 2010 to 10% last quarter. That could be a function of the "viral" couponing frenzy growing stale, and as I said before its model can be replicated; take Travelzoo (TZOO) for instance, which set up its own daily local deal section just like Groupon. GRPN's revenue is expected to be $1.7 billion this year, while it is approximately breakeven profit-wise. It employs 7,000.

I scoured the market for some other market caps just under $17 billion and found the following among others: H.J. Heinz (HNZ), Activision Blizzard (ATVI), Raytheon (RTN), Transocean (RIG). Of course you know Heinz, because its ketchup is in just about every restaurant you've ever been to, and in your fridge as well. It started making its Ketchup in 1869. It also makes Classico, Lea & Perrins, Ore-Ida and several other brands. It employs more than 30,000 people in 19 factories and generates more than $10 billion revenue annually.

Raytheon employs highly respectable scientists and engineering talent to make products that give the U.S. military some of the capabilities that no other nations have. Take for instance the Tomahawk cruise missile, a $569,000, 3,500 lb. mechanical marvel that can travel 1,550 miles and can be programmed to fly to up to 15 pre-programmed destinations while maintaining a stable low-altitude trajectory and following the earth's topography at 550 mph, with accuracy within 10 meters. If you are another company trying to replicate Raytheon's business, good luck. It generates $25 billion of revenue annually and employs 72,000.

Of course, the current value of Groupon anticipates it growing to the size and stature of the likes of Heinz and Raytheon, but it's got a long way to go and as I said the hype might already be wearing off. And I don't see any groundbreaking innovations or nationwide brand loyalty that has lasted 142 years. Again, you could call me an e-skeptic but this is starting to smell a little bit like tech bubble 2.0.

David Urani
Wall Street Strategies