In the beginning of the month, many market commentators saw the successful initial public offering of Groupon (GRPN) as a sign of strength for the general market.
The much hyped IPO succeeded as the stock closed at $26.11 on its first day, up over 30% from its offering price at $20.
The stock has been remarkably stable ever since, trading in a $24-$26 trading range until today. Even this morning the stock opened higher, trading at $24.75 before a massive intraday correction took place. Right now the stock is off 14% trading at $20.50, at one point today trading just 3 cents above its offering price.
The Google factor
Last year the search-giant Google (GOOG) tried to acquire the then privately held firm based in Chicago for about $6bn. Despite today's slide, a $20 price still implies a market value of $12bn. Analysts are pointing out that Groupon might have created an artificial shortage of shares for investors to buy by offering just 5% of the company in its IPO when it raised $700mn last month.
Increased competition
Well known is the structural weakness in Groupon's business model, being the "low cost of entry" for competitors. With the crucial shopping weeks coming ahead, competitor Livingsocial announced 20 deals with nationwide merchants ahead of Friday's crucial Black Friday shopping day. These kind of deals are targeted at obtaining large amounts of customers at little or no profits, raising fears that Groupon might end up in a classic price war.
Accounting/business practices
in September, even before the IPO the company shocked the investment community by a large change in its accounting practices. No longer could it add merchants' payments to its own revenues. As a result it restated its half year revenue from $1.52bn to $688mn, on which it still lost $248mn. Common are stories about local deals gone bad and merchants complaining about the large cut Groupon is taking.
Risk-off
With hindsight it seems that Groupon perfectly used the brief window of opportunity the IPO market provided last month. New issues including Linkedin (LNKD) and Fusion-Io (FIO) have seen impressive initial returns but all saw significant double-digit corrections in recent weeks. Increased competition, questionable accounting practices and a small free float were all known for months, Groupon just got hammered as the next high-beta stock fallen victim to the "risk-off" mode.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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