By JACK HOUGH
Groupon, a website that offers daily discounts from local merchants selling flowers, massages and the like, has filed for an initial public offering and might raise an amount that would value the company at $20 billion, the Wall Street Journal reports. But its value could conceivably shoot much higher. After all, LinkedIn, another recent Internet-company IPO, doubled in its first day of trading. So if the same frenzy of buyers were to greet Groupon, presto -- its market value could soon be $40 billion.
Even more remarkable: Groupon, LinkedIn and Facebook -- a trio of Internet darlings just beginning to dabble in the public markets -- could together soon eclipse the market value of technology titan Google.
But first, how much is $40 billion for a company like Groupon? Let me put in context, because the largest numbers most of us have a feel for are house prices, and calling it 160,000 houses doesn't help. I wrote of LinkedIn that it would debut as the most expensive company in America based on the ratio of its market value to its yearly sales -- a popular metric for valuing young companies. Indeed, its current price-to-sales ratio of 25 is unmatched in the entire S&P Composite 1500 index of small, midsize and large companies. The index's median price-to-sales ratio is a quaint 1.5.
Now look at the price/sales ratio of a comparable company, Facebook. The social media giant isn't publicly traded and therefore doesn't release its financial details beyond a small circle of investors, but it's reportedly on pace to generate $2 billion in sales this year. According to a recent Reuters report, a stakeholder is seeking to sell shares at a price that would value the company at $70 billion. That seems feasible, because shares have already sold at a price that values the company at $65 billion. So that's a price-to-sales ratio of 35.
Groupon has recorded $1.3 billion in sales over the past four quarters, which would put its possible $20 billion IPO value at 15 times sales, but those figures mislead. When Wal-Mart (WMT)
The number to use for Groupon is gross profit, or the fees it collects from merchants, which as management rightly puts it in the company's regulatory filing, is "the best proxy for the value we're creating." Gross profit over the past four quarters was $530 million. A $20 billion IPO therefore puts the company at 38 times "sales." If we assume the most recent quarter, when gross profits were highest, is more representative of the company's current pace of business -- a good assumption for a fast-growing company -- then yearly gross profit rises to $1.1 billion and the price-to-"sales" ratio falls to a mere 18.
Price-to-earnings, if you're wondering, doesn't apply. Groupon has no earnings because it's spending richly to attract customers, resulting in sizeable losses at the moment.
Here's the part I find stunning. If Facebook is worth $70 billion and if Groupon's price jumps to $40 billion soon after trading begins, and if LinkedIn recently traded at a value of more than $7 billion, then those three companies combined are only a couple of weeks of giddy trading away from overtaking Google's market value of $138 billion, net of its cash and debt. What's odd about that? Google is a financial giant. Its sales are double those of companies like The Gap (GPS)
There used to be something in finance called a risk-reward tradeoff. It meant, among other things, that investors should pay less for things that are unproven, all else held equal. At the moment, investors are paying any price for companies whose key distinguishing factor seems to be that they haven't yet participated in the quarterly grind of reporting financial results that suggest their true worth. Once the shiny newness wears off, I expect these prices to come crashing down. For now, do what I do on the rare occasion I go to a casino: Don't bet more than you'd spend anyway on a day's entertainment and try to make the fun last as long as you can.
Corrections and clarifications: An earlier version of this story misstated gross profits for Groupon.
Follow Jack on Twitter: @jackhough