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Groupon IPO Hinges on Revenue

NEW YORK ( TheStreet) - Much has been written about whether Groupon is selling damaged goods in its initial public offering or whether its shares will end up being the deal site's best bargain yet .

For many investors, the key to answering that question will be Groupon's massive revenue generating prowess and how the company will manage cash to achieve shareholder returns.

After a dig through of consumer services companies going into an IPO with strong revenue reliant on specialty or internet sales over the last fifteen years, we've come to the conclusion that investors need to ask whether it's the next GameStop (GME - Get Report) and DSW (DSW - Get Report), or if it will flounder like Orbitz (OWW - Get Report) and others.

After Groupon goes public, its end-of-year earnings are likely to show that the company sold over $1.5 billion worth of deals coupons, even if it may lose over $400 million doing so. Few online focused consumer services companies have done IPO's with such a developed business and their fates have varied greatly.

After going public, DSW and GameStop shares have surged, Dex Media and Petco were taken private at significant premiums to their IPO prices and Orbitz, 1-800-Flowers.com (FLWS - Get Report) and BarnesandNoble.com fell flat.

Comparisons between Groupon, Orbitz, Dex Media, Gamestop, DSW, BarnesandNoble.com, Petco and 1-800-flowers.com are strong because they went into their IPO's with hundreds of millions, even billions in revenue. In contrast, Amazon (AMZN - Get Report) had $16 million in annual revenue during its 1997 IPO; Google (GOOG - Get Report) had $19.3 million in sales - making them incomparable IPOs.

Because of revenue in 2011 already in excess of $1 billion, Groupon is now seeking a less than 10 times 2011 sales valuation in its IPO, significantly lower than its previous 36 times 2010 revenue valuation in June and those used to value LinkedIn (LNKD - Get Report), Pandora (P - Get Report) in their offerings.

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