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Groupon CEO Andrew Mason tells potential IPO investors: We have yet to reach sustained profitability, and we have no shortage of competition. Our path will include some moments of brilliance and others of sheer stupidity. SeongJoon Cho/Bloomberg News

This all means Groupon won’t debut at the $20 billion to $30 billion market value that was talked about in the spring. Even the $10 billion market value, based on the current IPO range, looks excessive given the company’s lack of earnings, competitive challenges and slowing growth. Investors are probably better off buying its Groupons, which typically offer half-price deals at a range of businesses, than buying the stock.

It’s nothing short of phenomenal how big Groupon has gotten so quickly, but it’s getting to be a very saturated market with a lot of competition, notes Iain MacDonald, founder and CEO of Skillpages, a private social-networking outfit. Their market is not as defensible as Facebook’s or Google’s. There’s nothing that ties merchants to them.

Morningstar analyst Rick Summer pegs fair value for the stock at $8 a share (half its current level), or a $5 billion market value. His concerns include Groupon’s lack of an economic moat, and potential deal fatigue among consumers barraged with e-mails from Groupon and other services. Groupon’s main rival is privately held LivingSocial, which is about a third its size domestically. Others in the business include Google and Facebook.

He argues that Groupon is more of an advertising company than an Internet company. It has upward of 10,000 employees—about five times that of Facebook—because it needs: an army of salespeople to call on local businesses; customer-service reps; technology staff; plus writers to craft hundreds of catchy pitches a day for the deals e-mailed to most of its 142 million subscribers.

Groupon’s strategy has been to allow local businesses, which usually have limited or no advertising budgets, to reach new customers by offering discounted goods and services. A deal might offer a $50 restaurant coupon for $25. Of that $25, Groupon takes around $10, and the restaurant, $15. The restaurant hopes that the Groupon customer will spend more than $50, and then come back again.

With more than 78,000 merchants using Groupons in the latest quarter, the service clearly is resonating. Barron’s spoke to 20 companies that recently used Groupons as a promotional tool, including hair salons, restaurants, a comedy club and a yoga center. Many say it’s too early to tell whether Groupon users will turn into repeat customers, but the general view is that social media could be the wave of the future in marketing. For a look at what businesses had to say about Groupon, see the article at the end of this story, Room at the Inn? Groupon Needs Critical Mass .

The Bottom Line

Just months ago, Groupon’s valuation was estimated at $20 billion to $30 billion. After this week’s IPO, it’s likely to be more like $10 billion. That’s still too pricey. Avoid this deal.

Few companies have grown as rapidly as Groupon. Founded in 2008, the company had 142 million subscribers globally at the end of the third quarter, up from 21 million a year earlier. Nine-month revenues of $1.1 billion were more than seven times the $140 million in the same period of 2010. Much of Groupon’s growth this year has come abroad, where it is aggressively expanding.

It’s tough to value Groupon based on traditional financial measures, because it doesn’t have earnings. The company had an operating loss of $214 million in the first nine months of 2011. The financial picture has improved recently, with Groupon losing just $239,000 in the third quarter. That, however, appears to have been mainly driven by a drop in the company’s heavy marketing spending.

Groupon’s outspoken CEO, Andrew Mason, has argued that the heavy marketing, which totaled $613 million in the first nine months, will slow—and indeed it did in the third quarter. At that point, substantial profits could flow. So far, that hasn’t happened.

The latest quarter saw some troubling signs. Revenue growth moderated, rising 9% from the prior quarter, compared with 32% in the second quarter. The number of Groupons sold rose just 1%, to 33 million, from the prior quarter, versus a 16% gain in the second quarter. This could mean that Groupon’s reduced marketing spending, which helped its bottom line in advance of the IPO, may be hurting growth.

And Groupon’s take of deal revenue declined to 37% from 42% in the year-earlier period. Morningstar’s Summer says that competition could further depress the take rate, and obstruct the company’s path to sustained profits.

A $10 billion market value is a lot for a company with no profits and an unproven business model. This IPO is one deal to avoid.

Selling a Sliver

In their IPOs, many Internet companies offer only a fraction of their equity to outside investors. Such a tactic helps support stock prices by keeping supply low. While Groupon’s revenues have risen sharply, profits are elusive.