Wednesday, November 23, 2011

Groupon (GRPN) Fell 15% Yesterday and Threatens to Bust the IPO Price

I thought, in the 'intermediate to long run' the stock of Groupon (GRPN) would show to be a hyped bust.  Growth rates are already slowing, and the whole business model simply is one where many business owners do not see the return of giving away 50% of their revenue stream for a customer who is not 'sticky'.   Here is what I wrote the day it came public in early November:

With many of its business metrics already slowing, my bet is Groupon is going to be the short of the year in about 24-36 months. But we need to see a lot of shares come unlocked before any form of reasonable market can be made in the stock.

But in the short run, I thought with such a tiny float (the newest Wall Street gimmick to elevate prices), would keep the stock going until at least the first lock up.  I was wrong on that count - the stock fell 15% yesterday and has already busted the IPO price.  Another example of 'sold to you' by the Wall Street syndicate.

While still an expensive stock to short (20% margin rate) its far cheaper than it was the previous few weeks when one had to pay 80-90% margin, so at least someone is finally making money on this lipstick covered entity.

Via Reuters:

  • Groupon Inc stock slumped 15 percent on Tuesday on concern about increased competition, leaving shares of the largest daily deal company close to their $20 initial public offering price.  Groupon shares fell to as low as $20.03 in late morning action before recovering slightly. 
  • Groupon raised more than $700 million in an IPO in early November.
  • LivingSocial, Groupon's closest rival part owned by Inc, announced plans on Monday to offer more than 20 deals with national merchants over the crucial Black Friday shopping period.
  • Daily deal companies often subsidize national deals, making them less profitable than offers run with local merchants. The national deals usually bring in lots of new customers, but put pressure on profit margins.
  • "In the last few days, we've been hearing about LivingSocial stepping up promotions," said Edward Woo, an analyst at Wedbush Securities. "The concern is that there will be much more competition for Groupon going forward."
  • LivingSocial is offering deals of at least 50 percent off with companies, including Verizon International Inc and Vodafone Group Plc's Verizon Wireless, Skechers USA Inc, OfficeMax Inc, Hearst Corp and New York Times Co on Black Friday.
  • On Monday -- known as Cyber Monday because consumers often shop a lot online that day -- LivingSocial is running 50 percent off deals with companies, including Electronic Arts Inc, Blue Nile Inc and Hewlett-Packard Co's Snapfish.
  • LivingSocial's move to offer so many national deals shows competition in the daily deal business will be particularly intense this holiday, Woo added. "Groupon is not doing much for Black Friday, so LivingSocial may take customer attention and business away from Groupon," he said.
  • "The overhang of competition existed during the IPO and it still exists today," said Rick Summer, an equity analyst at Morningstar.
  • Herman Leung, an analyst at Susquehanna Financial Group, said Groupon shares were also lower because it became easier this week to short, or bet against, the company.  Groupon sold about 6 percent of itself in the IPO - one of the lowest floats of the past decade.
  • A scarce supply had some brokers charging an annual rate of 90 percent to 100 percent to borrow Groupon stock. But more shares became available to borrow this week, reducing the borrow rate to just over 20 percent, according to Quadriserv AQS, which runs a securities lending platform. "The cost to borrow was at nearly impossible levels, but it got easier starting yesterday," Leung said.
  • Analysts also said Groupon investors may be concerned about LivingSocial's plans to raise another round of private financing. The New York Times reported recently that the company is close to raising about $200 million.  "When your largest competition is looking to raise cash to compete against you, that's a little concerning," Leung said.

No position

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