Groupon IPO at an 88% Discount?

Groupon looks like the incredibly shrinking IPO. Just six months ago, its valuation was roughly $25 billion. Now? Well, according to a Bloomberg article, it could be as low as $3 billion. Keep in mind that last December, Google (NASDAQ:GOOG) offered $6 billion for the daily-deals site.

So why the implosion? For the most part, it is yet another classic case of the boom-bust nature of the tech world. Let’s face it, only a few companies are able to become long-term winners, such as Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and Apple (NASDAQ:AAPL). The rest either sell out or go bust.

In the case of Groupon, it certainly was targeting a huge market opportunity. Local merchants always are trying to find ways to get customers. So yes, they will pay a premium for this.

The problem is the Groupon model is flawed. As noted in a recent piece in The New York Times, many merchants are disappointed with the results. Basically, the deals often draw customers who have little loyalty.

So merchants are learning a valuable lesson — that is, not all customers are good. In fact, enough “bad” customers can kill a business.

Interestingly enough, it looks like Facebook has taken note of all this. The company recently closed down its daily-deals business but continues to focus on local merchants. To this end, it has teamed up with the Chamber of Commerce and National Federation of Independent Business to provide support and training to help business owners with social marketing. It looks like an approach that should get traction.

As for Groupon, there certainly are other reasons for its discounted valuation. The company had to restate its revenues, resulting in a number less than half of its original report, and the company continues to face extreme competitive pressures. And the company is losing hundreds of millions of dollars as the cost of acquiring customers escalates.

Amid all this, investors likely will focus on the business model. And for the most part, it is hard to believe it can be sustainable for the long haul.

Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.