Before jumping with joy over Groupon’s announcement that it’s getting into the mobile-payment business, beware: Wall Street is doing what it always does — trying to extrapolate a valuation out of something akin to thin air.
Groupon’s beaten up stock lifted more than 7 percent at one point on Wednesday's news to prices just above a whopping $5 — a far cry from its euphoric post-IPO highs of around $26. (Read More: Groupon Gambles Big on Mobile Payments.)
In this case, as independent analyst Rocky Agrawal put it via Twitter, “The only ‘news’ today on Groupon is that the beaten up company is trying to draft on Square’s recent $3.25 billion valuation.”
Square, the brainchild of Twitter co-founder Jack Dorsey, has recently been valued at $3.25 billion after closing more than $200 million in new funding. (Read More: Square's Next Frontier: Dorsey Says Payment Company Heading Abroad.)
That’s great for Square, but if investors have learned nothing else from the recent social media bubble it should be this: All of those valuations based on the most recent rounds of funding aren’t real until they are.
There was a time, for example, Facebook pre-IPO was supposedly valued at more than $50 billion. (It’s market cap is now $46 billion.) And Zynga pre-IPO was valued at more than $10 billion (it’s now less than $3 billion).
And then there’s Groupon, which was valued pre-IPO at more than $7 billion, before going public with a value of nearly $20 billion. It’s now valued at around $3.2 billion, and that’s with the help of Wednesday's pop.
While mobile payments may be additive for Groupon, it’s also a highly competitive space including not just Square but the likes of eBay’s Paypal and a new service being rolled out by Intuit . (Read More:
The result could be falling transaction prices all around.
“It’ll be a race to the bottom,” Agrawal said.
—By CNBC's Herb Greenberg
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