Groupon sizzles in public debut but worries linger

NEW YORK (AP) -- Groupon’s stock sizzled in its public debut Friday despite concerns about its accounting practices ahead of an initial public offering and doubts about the viability of its business model.

The first-day pop for the pioneer of online group discounts was largely expected, though. Not even a gain of about $4 billion in market value -- to nearly $17 billion -- could erase lingering questions about its long-term prospects.

In fact, it may have added to them.

Bigger than IPOs for Internet radio company Pandora Inc. and professional network LinkedIn Corp., Groupon’s debut served as an icebreaker for a frozen IPO market.

It further sets the stage for the public debut of online game company Zynga Inc., which is expected in the next few weeks. It’ll culminate next year, with the expected IPO of Facebook, one dwarfing them all.

After pricing above its expected range on Thursday, at $20, Groupon’s stock rose $6.11, or 31 percent, to close Friday at $26.11. Earlier in the day, it traded as high as $31.14.

Still, analysts remain worried about the risks concerning the company, especially as the stock price increases.

“Until investors see the full profit model unfold over time, expect this stock to be highly volatile,” said Kathleen Shelton Smith, principal of Renaissance Capital, which operates IPOhome.com. “The first day of trading is typically more about supply and demand. Fundamentals will take over in the long run.”

Groupon makes money by sending out frequent emails to subscribers offering a chance to buy discount deals for anything from laser hair removal to weekend getaways. The company takes a cut of what people pay and gives the rest to the merchant.

Because the model is easy to replicate, it has spawned many copycats after its 2008 launch, from startups such as LivingSocial to established companies such as Google Inc. and Amazon.com Inc. (which incidentally runs its deals through LivingSocial).

Groupon has the advantage of being first. This has meant brand recognition and investor demand, as evidenced by its strong public debut.

Nonetheless, Chicago-based Groupon Inc. has faced scrutiny about its high marketing expenses, enormous employee base and the way it accounted for revenue.

Groupon splits the money it collects from customers with merchants. But it reported all of its gross billings, not just the money it gets to keep, as revenue. After federal regulators questioned it, Groupon submitted new documents in September that showed that net revenue in the first half of this year was about half of what it originally reported.

Using the new accounting method, Groupon had revenue of $1.12 billion in the first nine months of the year. But it lost $308 million because of high operating expenses.