In Silicon Valley, venture capitalists continue to write big checks at nosebleed valuations. Just look at Dropbox. The storage company fetched a $4 billion valuation, even though revenues are estimated at about $240 million (according to Forbes).
But when it comes to Wall Street investors, the sentiment is much more restrained. This especially is the case with the upcoming Groupon IPO. Even though the company is growing at a rapid rate, the valuation has come under lots of pressure. According to recent reports from The Wall Street Journal and the The New York Times, Groupon and its bankers have scaled down the company’s valuation to around $12 billion — six months ago, the valuation was between $25 billion to $30 billion. This lowered expectation comes just days before Groupon will hit the road to plead its case with potential investors.
Of course, a big problem is the recent market volatility. Other recent IPOs — like Zeltiq Aesthetics (NASDAQ:ZLTQ) and Ubiquiti Networks (NASDAQ:UBNT), both of which went public this month — suffered from big cuts in valuations.
Groupon also plans to issue only a small amount of stock, possibly less than 10% of its outstanding shares. The idea is to create scarcity, which certainly is an effective way to juice stock price. The strategy previously has worked well with other dot-com deals like Zillow (NASDAQ:Z), LinkedIn (NASDAQ:LNKD) and HomeAway (NASDAQ:AWAY).
The idea is that over time, Groupon will issue more shares, such as with secondary offerings. The hope is that the company will be able to continue to grow and get closer to profitability, which could mean some nice gains for investors.
Groupon already has a slew of top-notch underwriters, which include Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS). They are likely pushing their investors hard to get an allocation of the deal.
But the Groupon strategy is far from perfect. The company has undergone tremendous media scrutiny because of changes in its accounting, as well as skepticism about the daily-deals business model — specifically, whether it can ever really generate profits.
So, Wall Street minds likely will have a lot of work ahead to make the Groupon deal a success. But, this is why they’re paid the big bucks, right?
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a positioning any of the stocks named here.