From the Slope of Hope [7]....
Only half a year ago, Groupon was the talk of the town. It was the biggest, hottest IPO on the horizon,and it was the darling of the social media industry. Imitators were everywhere, but there was one giant that was far ahead of everyone else: Groupon.
Well, one glance at a stock chart will show you just how much the biggest, hottest IPO has been embraced since it went public. I offer you the following:
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Now that it's lost two-thirds of its peak value (which occurred, cruelly, on the very day of its initial public offering), Groupon has pivoted from enviable leader to pitiable loser. And the stock price, from a chartist's perspective, doesn't have a firm shelf of support upon which it can rely for some much-needed stabilization. There is nothing but air between its current valuation and $0.00.
This must be particularly painful for original shareholders because of an important fact that 99% of the world has forgotten: none other than Facebook was ready for acquire Groupon for about $6 billion about a year and a half ago. Groupon told them to go jump in a lake.
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Before continuing, let's check out Groupon's current market capitalization, shall we?
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OK, so let's agree that the current market cap and the prior offer are roughly the same price (what's a billion dollars between friends? I mean, sheesh, that's just one Instagram!) So the reality of the situation is that the management of the company now faces the never-ending nightmare of being a public company (with all the attendent expenses, shareholder lawsuits, quarterly earnings reports, Sarbanes-Oxley, and all of that other happy hoo-ha) instead of cashing out for an amount that, based on Facebook's valuation growth over the past eighteen months, would certainly be far greater.
In other words, would you rather be sitting on a ton of pre-IPO Facebook stock right now (whose liquidity is just a month away at this point) or a smaller amount of Groupon stock which comes with the millstone of being a publicly-held enterprise? Yeah, the first one. I thought so.
It's interesting too, looking at the Google Trends for Groupon. The highlights tell the story nicely. Google is "close" to buying them. The deal doesn't happen, so Facebook fires up a competing feature. Then GRPN goes public. Surges. Slumps. And then gets "probed" by the SEC, which has got to be uncomfortable.
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I've had a special interest in Groupon (as opposed to other "social" companies whose stock are falling to pieces, like, say, Pandora) for a long while. There are a few things about the company that have never quite sat right with me:
(a) Accounting Questions - As a chartist, I usually don't care about fundamentals such as accounting. But the stories floating around about the not-quite-kosher accounting got my attention.
There have actually been a number of "mini-scandals" going back over the past couple of years. But here's a simple analog to capture the failure of the "smell test" - - let's say I started a company that made change for people (e.g. you come in with a dollar, and I give you 99 cents in change and keep a penny for myself as a convenience fee).
Let's say over the course of a year I made $100 million in change for people. What are my revenues? To my way of thinking, they are a million dollars. I'll have expenses, of course, and what's left over is profit.
But my impression of the Groupon approach - - at least before they cleaned up their act - - is that the same business would proudly declare they had $100 million in revenue. After all, the cash passed through my hands, didn't it? But it takes a very distorted view of the world to believe that a business should be represented in this fashion.
(b) Dumping stock before the IPO - historically, venture capitalists put money into a company to fund the company's growth. These days, it seems late-stage VCs have lost enough power that they have to shove stock directly into the pockets of early employees in order to get a deal done. Witness this finance round from the company's own S-1:
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It just seems bad form, to me, to allocate the vast majority of an "investment" to the purpose of allowing founders and early VCs to take hundreds of millions of dollars off the table. I mean, sure, if you're Mark Zuckerberg, and if sell off a few million bucks of stock to buy a nice house, a nice car, and so forth - - bully for you. But to dump a meaningful portion of your stock even prior to an IPO doesn't exactly scream a lot of faith in your own enterprise.
Although, it seems, they were smart to have done so. After all, if someone's going to hold the bag, why not let it be some schmuck retail investor?
(d) The service itself - I just don't know how consistently popular these Groupons are going to be. You've all read the stories about small merchants giving the service a try once and vowing never to go back.
But I'm speaking from the standpoint of a consumer who, I would guess, would be the very model of a Groupon customer. We've got a family. We spend ungodly amounts of cash on eating out, vacations, and all manner of consumer goods and services. We are probably in the 99th percentile in terms of technological savviness.
But, in our lifetimes, we have bought two - - count 'em - - two - - Groupons. One of them was for a hair stylist. The other one is for The Counter (a local burger place). And the hamburger coupons are something I already resent, because they expire soon and it turns out they only work at a location which is a half hour drive from here, as opposed to the local establishment. So I'm kind of pissed that we even bought these coupons, the 50% discount notwithstanding.
Some people think Groupon's burn-out as a public company is simply a harbinger of what's to come with the oh-so-widely anticipated IPO of Facebook next month. I don't. I think all these "social" companies are going to follow into two camps. There are going to be dogs like Pandora, Groupon, and Zynga - - companies that I am highly confident will all continue to wither away - - and there are going to be the winners who basically, like Google, have a monopoly on some certain aspect of the web. LinkedIn, for instance, and....Facebook.
Bottom line for me is that Groupon's stock performance isn't a surprise to me at all. There will be hopeful "pops" in price along the way, but my opinion is that this thing is going to wither into sub-$5 territory within the year.