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With stock market volatility suppressing initial public offerings in recent months, many were hoping Groupon Inc.'s (Nasdaq: GRPN) splashy IPO on Friday would spark a revival.
But analyst skepticism over Groupon's long-term prospects and lingering fears over the European debt crisis, as well as the tepid U.S. economy, mean that the dry spell for the IPO market will stretch on into next year.
On its first day of trading, Groupon performed better than some expected, rising 30.55% to $26.11 a share from its initial $20 per share offer price.
Few expect that pop to last, however. And the sooner Groupon fades, the more discouraging it will be to the dozens of companies looking to go public.
Deserved or not, some of the investor mania for social media stocks – some of which went public earlier this year, like Linkedin Corporation (NYSE: LNKD) and Pandora Media (NYSE: P) and some of which are planning IPOs, like Facebook Inc. and Zynga Inc. – has rubbed off on Groupon.
But Groupon's easily duplicated business model, fuzzy accounting practices and struggles to reach profitability have many experts questioning the daily-deal company's ability to survive, much less keep growing.
"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."
Furthermore, Groupon's IPO was structured to ensure the price spiked on launch. To keep demand artificially high, only 5.7% of the company, or 35 million shares, were floated. While in the neighborhood of other social media IPOs this year such as LinkedIn (8.3%) and Pandora (9.2%), it's far below the 27% average IPO for tech companies, not to mention the 40% average for all IPOs.
"The post-IPO investor will be taking a risk on this deal," Josef Schuster, founder of IPO research and investment house IPOX Schuster, told Reuters. "It's maybe a good trade for a day trader, in and out in a single day, but I don't want to be in it for the long run."
IPO Market in Shambles
Groupon's shaky long-term prospects are not the kind of news the IPO market needs right now.
The optimism in the spring – when 69 companies had gone public by May 31 – all but evaporated over a tumultuous summer for stocks rocked by the debt ceiling debate in Washington and rising concern over the sovereign debt crisis in Europe.
"When volatility increases, it's impossible for IPOs to get done," Kathy Shelton Smith, founder and principal of IPO research firm Renaissance Capital, told CNN Money. "You have to put a price on it and volatility makes investors shy away."
In the previous two months just two companies have had IPOs, Ubiquiti Networks Inc. (Nasdaq: UBNT) and Zeltiq Aesthetics (Nasdaq: ZLTQ), both in early October.
According to Renaissance Capital, 215 companies have filed the paperwork for an IPO, the most companies waiting to go public since 2001.
Conditions are so poor that in the past two months at least 15 companies have withdrawn their IPO paperwork, giving up altogether.
Prices in Reverse
The subpar performance of many of the companies that went public earlier this year has been just as discouraging as the volatile stock market.
More than half of this year's IPOs are trading below their offer price.
Some of the bigger disappointments have been Pandora, which is trading just below its $16 offer price, Freescale Semiconductor Holdings (NYSE: FSL), down 30%, Solazyme Inc. (Nasdaq: SZYM), down 44% and Vanguard Health Systems Inc. (NYSE: VHS), down 49%.
Other IPO candidates looking at such grim performers are understandably reluctant to jump in.
The IPO market eventually will perk up, but not until most of the issues disrupting stocks reach some sort of resolution. And that doesn't appear to be happening any time soon.
"Market turmoil … can bring public offerings to a rapid halt," writes Steve Schaefer of Forbes. "Rebuilding the confidence to launch companies onto public markets tends to take longer as investors need to get comfortable once again making bets on companies that may have limited track records."
News and Related Story Links:
- Money Morning:
2011 IPOs: Busts and Bargains
- Money Morning:
The Rush to Debut Groupon IPO Is One More Reason to Avoid this Tech Trap
- Money Morning:
Don't Get Burned by the New Tech Bubble
- Money Morning:
IPO Market Perking Up, But Still Not Ready to Party Like It's 1999
- Bloomberg Businessweek:
Groupon, Beware: Of 25 Hot IPOs, 20 Tanked Later
- The Atlantic:
Groupon Dives Into the Tech IPO Bloodbath
- The Associated Press:
The IPO market, an engine of job growth, stalls
Analysis: Groupon IPO to test nascent private stock markets
About the Author
Dave has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.