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Hey, Groupon… Any Chance of a Discount on Your Fat IPO?

Can coupons really be worth $25 billion?

On the heels of my recent rant about overpriced web company valuations, Bloomberg Businessweek cracked a story last week that blows them all out of the water. Big-time.

Apparently, Groupon, the massively popular deal-per-day company, has met with investment bankers to consider an IPO.

The rumored price tag? A whopping $25 billion. That would officially top the largest IPO ever – the Agricultural Bank of China’s $22 billion 2010 deal.

Shock #1: That’s an incredible price for a company that e-mails discount coupons to consumers.

Shock #2: At $25 billion I rank Groupon a “buy.”

Here’s why…

The Simple Business Model That Has Raked in Billions

Let’s take a quick look at what Groupon does…

Basically, when you join Groupon, the company e-mails you coupons, offering deals on all manner of products and services. But they’re not your typical “20% off coupons.” Instead, it’s like buying a $20 gift certificate to a local restaurant for only $10.

So in order to get a discount, you pay upfront for the privilege. And when you pay $10 for the coupon, Groupon splits it 50/50 with the merchant. To generate these deals, Groupon employs a staff of about 5,900, mostly dedicated to calling local businesses.

So what do these businesses make of Groupon? In short, they love it. Virtually all who participate get overrun with new and existing customers alike after the deals are released. In fact, Groupon claims that 97% of businesses return for a second deal.

This simple model has made Groupon an amazing growth story. The company’s revenue leapt from $750 million in 2010 to an expected $3 to $4 billion this year. Plus, having been valued at $1.3 billion in April 2010, that figure had shot up to $3 billion by November and in January 2011, it turned down a $6 billion takeover offer from Google (Nasdaq: GOOG).

But the Groupon of the future is poised to be something much different – and much bigger…

The Real-Time Upgrade That Opens Up a Massive Market

Within the next month, Groupon will launch “Groupon Now.”

Basically, this kicks its regular online deals service up a notch by notifying you of deals in real-time. For example, when you pull out your phone and launch Groupon Now, it will read your current location and highlight the deals available to you at that very moment.

Hungry? There’s a pizza place a few miles away, selling a large pie for $8 instead of the usual $12.

Bored? There’s a nearby movie theater with a special matinee deal.

This isn’t just a useful service… it could be a massive market. Especially when you consider that we still spend more money locally than online. What if all local commerce could go through Groupon in the same way that most of the web goes through Google?

Can Groupon Now capture that market?

Can You Say “Win-Win?”

Just like Facebook or Twitter, Groupon Now’s success will depend on a “network effect.” In other words, it will need plenty of customers and businesses to keep Groupon Now useful – and profitable. Let’s look at both…

~ The Consumer Angle: On the user side, Groupon has already established a rock-solid foundation. The regular service boasts 32 million subscribers, so the real-time side should see significant migration. It will be a great way to find new places and save money while on the go.

~ The Business Angle: From a business standpoint, Groupon Now could be a real game-changer. It will allow businesses to make real-time, highly targeted pitches to customers.

For example, a business owner can log in and change the deal at any time. So if a restaurant has empty tables to fill, extra inventory it wants to unload, or a last-minute cancellation to replace, it can do so with a few clicks. And these small tweaks can mean the difference between success and failure for small businesses.

So what’s the bottom line on Groupon’s proposed IPO?

The Groupon IPO… Yes or No?

A $25 billion IPO would value Groupon at about five times its 2011 sales. By comparison, Google, Qualcomm (Nasdaq: QCOM) and Visa (NYSE: V) all trade for more than that. And they didn’t quintuple their sales this year like Groupon did.

With Groupon Now, the company could essentially take the place of the Yellow Pages. To put Groupon in perspective, Yellow Media was valued around $14 billion at its peak. And with Groupon’s ability to target advertising, it could be much more profitable.

Of course, Groupon’s prospectus and a definitive valuation will make the picture clearer. But right now, Groupon could be an opportunity to buy into an indispensable – and highly profitable – part of the World Wide Web.

Ahead of the tape,

Matthew Weinschenk

Matthew Weinschenk