Social media stocks were all the rage this summer, but that enthusiasm is certainly on the wane as we approach the Groupon IPO.
And rightfully so.
This would-be tech titan is more like a tech trap.
Groupon is expected to price its initial public offering (IPO) today (Thursday) and start trading tomorrow, after its last push this week to generate investor interest.
Groupon plans to sell 30 million shares in a price range from $16 to $18, giving the company a market value of $10.1 billion to $11.3 billion.
That's a drastic 44% to 50% cut from the $20 billion valuation the company had earlier this year. And what's worse is that a lack of investor interest may result in an even lower number.
But the fact remains Groupon hasn't proven it's worthy of long-term investment.
"I wouldn't touch it with a ten-foot pole," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "This isn't a stock for an investor looking for a long-term play with stability."
Why the Rush for a Groupon IPO?
Groupon delayed its initial plan to debut in the summer, and now seems eager to come to market. The fact that it's hurrying the process amid a number of obstacles has raised some eyebrows.
To begin with, this is hardly a good time to list on an exchange. The European debt crisis continues to whipsaw markets from one day to the next. For example, the Dow Jones Industrial Average enjoyed a 339-point, 2.9% gain on Oct. 27, but that gain was followed just two trading days later by a 276.10-point, 2.3% drop.
Market volatility is a big reason why the U.S. IPO market has been stagnant since July, despite a strong start to the year.
"Why are Groupon investors in such a hurry to cash out? What's the rush? Is there something lurking behind the scenes of which we are unaware?" wrote accounting professors Anthony H. Catanach Jr. and J. Edward Ketz in The New York Times. "Or is the rush to the IPO because Morgan Stanley, Goldman Sachs and Credit Suisse want to collect their fee (which is tied to the market value of the stock issued) before the company's value drops further?"
Money Morning's Fitz-Gerald said it's likely the investment banks are a big impetus behind the debut.
"I would doubt the investment banks think the markets will push higher, so they are probably counseling their clients to get it done before prices fall off further," he said.
Additionally, it hasn't been that long since the U.S. Securities and Exchange Commission required Groupon to amend its registration statement because it used the "ACSOI" (adjusted consolidated segment operating income) accounting metric. This alternative method understated operating losses by $120 million because it excludes non-cash and online marketing expenses.
In September, the SEC again requested Groupon correct its revenue-reporting method, because it over-reported 2010 revenue by $400 million.
This is hardly news you want fresh in prospective investors' minds when you try to sell them on your company's profitability – something that's been doubted since its initial plans to go public.
Groupon's Doubtful Money-Making
Groupon Chief Executive Officer Andrew Mason has been on an IPO road show for weeks, saying that "the proof is in the numbers" when it comes to the company's ability to make money.
But as the SEC told us, those numbers are inaccurate. And they're based on the growth of the past, not the outlook for the future.
When Groupon filed its Form S-1 registration statement with the SEC June 2, it listed its value at $750 million based on its soaring growth.
Indeed, its pace of growth has been incredible. Groupon subscribers grew to 142 million by the end of 2011's third quarter – a 93,321% increase from 152,000 in mid-2009. The company doled out 28.1 million coupons in just the first quarter of 2011, compared to 30.3 million in all of 2010.
But many analysts believe Groupon's days of explosive growth are a thing of the past. The industry also has low barriers to entry, as Mason has admitted on his IPO road show. And Groupon offers no competitive advantage to keep its subscribers from flocking to the competition.
"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," Iain MacDonald, founder and CEO of private social-networker Skillpages, told Barron's. "Their market is not as defensible as Facebook's or Google's. There's nothing that ties merchants to them."
The company's revenue growth also has slowed this year. Although in this year's first nine months the company brought in $1.1 billion – seven times as much as the same period in 2010 – revenue growth slowed to 9% in the third quarter from 32% in the second quarter. The number of Groupons sold rose only by 1% to 33 million from the previous quarter, down from a 16% jump in the second quarter.
Groupon also is getting a smaller cut of deal revenue, down to 37% from 42% in the same quarter last year – a reduction likely taken to compete for merchants.
Morningstar analyst Rick Summer said with the slowing growth and increased competition, Groupon is worth more like $8 a share, about 50% less than where it's priced now.
All in all, there's no reason to jump on the Groupon IPO, and those who already have could try to sell fast.
"Groupon may now have a chance to make money out of the gate, but there's still a lot of reasons people see not to buy and hold the stock," Scott Sweet, senior managing partner at IPO Boutique advisory firm, told The Financial Times. "There will be big trading volumes on the first day."
News and Related Story Links
- Money Morning:
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- The Financial Times:
Groupon pushes on with IPO despite markets
- The New York Times:
Another View: Can Groupon's I.P.O. Be Saved?
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