Groupon valuation : a bubble ?

Analysts are questioning the $20bn-plus valuation being attached to Groupon, the loss making discount site that has announced its plans to go public.

Groupon confirmed on Thursday its plans to go public, raising an estimated $750m on the US stock markets at a price that could value it at potentially over $20bn (£12.23bn). The company will become the latest social media firm to go public, feeding an investor frenzy for new technology companies.

But after looking over the financial details released this week, some analysts are sceptical about the long-term prospects for the shares. "It's just not a rational valuation," said Sucharita Mulpuru, analyst at Forrester Research. "It's not based on logic, it's based on whatever the highest bidder will pay for the company."

David Menlow, founder and president of IPOfn Online, said: "At some point there is going to be a clear separation between fact and fiction. At the moment, investors can't get past the fiction." Menlow added that investors were making decisions based on "emotion" but that reality would eventually set in.

Groupon, a three-year-old Chicago-based start-up, released some figures with its filing announcement. In 2009, Groupon's first full year of business, the firm brought in $30.47m in revenues. In 2010 revenues reached $713.4m, according to its IPO filing.

The company sells coupons offering discounts to local businesses, taking a cut in any money the business makes. It has 83m subscribers across 43 countries, according to its filing, and has 7,000 employees – half of which are in sales. But for all its huge revenues, Groupon is loss-making and candidly admits it intends to continue losing more money. The company recorded a loss of $413.4m last year, and lost another $113.9m in the first quarter of 2011.

Last December, Google offered $6bn for Groupon, a figure many analysts described as absurd at the time. Now it looks set to be valued at more than three times that figure.

Mulpuru said Groupon has "spent $1bn to make $700m. How do they expect to make $2bn? None of their competition has gone away."

Alan Patrick, co-founder of analyst Broadsight, said Groupon's value was based on a belief that it could dominate the market for online discounts. "Neither of these capabilities are proven, both are risky, the long-term market is a low margin one – but right now is bubble time."

Groupon founder, Andrew Mason, made clear the risks the company faces in a letter to "potential shareholders". Mason warned that Groupon's path will have "twists and turns, moments of brilliance and other moments of sheer stupidity". The company may make financial sacrifices in pursuit of "ambitious bets on our future". Mason wrote: "Life is too short to be a boring company."