Groupon falls below $20/share

http://finance.yahoo.com/q?s=GRPN

by ila • 15 years ago

183 104 15 years ago

finance.yahoo.com

marvin3• 15 years ago

Not going to make any predictions for the future here...but whether this should be characterized as a crash or not (at the present moment a decline from 24.5 to 18 over two days, about 27%) is a semantic question and open for discussion.

This is actually a very interesting question. Keeping the specifics of Groupon's business out of the equation at the moment, the pricing of growth companies is an incredibly inexact science. If most of these companies were publicly traded and liquid, you'd expect fluctuations of at least 30% a day during volatile periods. Just imagine the atmosphere in an average startup: One day you're going to conquer the world, the next day you're doomed...depending on prevailing conditions and random issues that pop up. This "atmosphere" (or expectation) carries over to the people who are attempting to determine the market value of your company. That's what the stock market is trying to: from moment to moment, determine the exact market value of each company.

The market still hasn't mastered pricing stocks like these (and it probably never will, potentially extreme growth stocks like technology startups practically by definition have huge volatility), but it is getting better. Look at the skeptics who try to price startups on revenue/profits alone. Obviously a bunch of really smart people in a garage with a sound plan but no revenues are worth more than $0. Some of these groups are bound to strike it rich, so average across all of them and you'll get a positive (perhaps very large) number. This is why we see large valuations of early-stage startups. But how large should the number be? The exact value of a company is the present-value adjusted worth of all its future profits. Determining this number is what everyone who does value-based investing attempts to do.

But finding this number is impossible, especially if you're investing in a very young company. I think that a lot of tech investors today are attempting to average the value across a large number of promising companies, instead of looking too much at the specifics of a single one.

Due to the inherent volatility, investing in potentially extreme growth companies like Groupon and LinkedIn is a _hugely_ risky business, unless you happen to be a genius who sees something about their business that no one else does. There were probably geeks who made these kinds of observations about Google in its early history.

antr6• 15 years ago

It wasn't a difficult task for some funds/investors to do the maths: the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc. This implied that (i) either Groupon was a safer investment than the above, or, (ii) that Groupon was completely mispriced. By method of elimination we are left with the later one. Groupon has HUGE execution risks, facing large and tough competition, image deterioration, reducing margins, etc, while still needing to achieve espectacular growth to deliver such value. How can you price something at such a ridiculous valuation when its equity risk is way higher than those other safer investments? To price Groupon at 20usd/share was just wrong. Some of us know how much did Groupon+investors push the underwriters to make this possible, and how many sales calls the equities' desk had to do to get this thing going. No surprise this is going underwater.

cbr• 15 years ago

> the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc

What do you mean by their "cash yield"?

I thought people investing in Groupon were doing so because they thought it might continue to grow as it had been, and potentially be absolutely massive.

scottkduncan2• 15 years ago

It is certainly an inexact science, but in this case the insiders tipped their hand ahead of the IPO about what they thought of Groupon's valuation. That the last pre-IPO raise went almost exclusively towards cashing out insiders and early investors rather than shoring up a pretty serious capital problem obviated the need for me to do speculative modeling of discounted cash flows. More so than any of the other recent high profile IPOs, this one just looked like passing the bag to folks with far less information about the company's actual prospects.

harryh• 15 years ago

That's one way of looking at it.

Another way of looking at it is to agree with marvin's assessment that tech companies (like Groupon) are inherently volatile and for any individual it makes sense to diversify. The people that cashed out didn't sell all of their holdings, or even a majority. They sold a relatively small portion so that their entire net worth wasn't locked up in an extremely volatile stock. That seems pretty reasonable to me. They'd (at least in my opinion) have been fools to do otherwise.

pbreit8• 15 years ago

I've been a Groupon defender (lots of downvotes to account for it!) but would agree that while cashing out early is reasonable, the magnitude in this case was breathtaking and, as you note, probably indicative.

jfoutz• 15 years ago

Writing a compiler is hard. One day, you're sure it'll be the fastest thing in the world, the next day there's sheer terror because no object code will run.

I'll grant you there could be 30% fluctuations from one given day to the next, but the months of work determining an accurate valuation should smooth out a lot of that noise.

I'd guess a hundred man years of effort went into the deal. Furthermore, this isn't grad-student eating ramen effort. This is high finance. Smartest guys on the planet and all that. Sure, you can't think of everything, but there must have been some underlying value that everyone believed in.

Any other process - highway throughput, software memory usage, year over year daily sales, cancer survival rates, just about anything getting 30% worse in two days would be a pretty pathetic failure.

Perhaps it is just noise, and it'll bounce right back to IPO valuation. I'm skeptical that that price was reasonable.

sunchild4• 15 years ago

If there's one thing I've learned about "the smartest guys on the planet", it's not to listen to what they say to the public. If you're on the front desk, you might get the real story behind the news.

carbocation• 15 years ago

Cost of borrow went from like 95% to 30% over the past two days so shorting recently began in earnest, it seems.

sks• 15 years ago

Yes, without efficient shorting market will not converge to a fair price. I guess we will find out the fair valuation of groupon in the next few days.

gyardley• 15 years ago

Haven't checked the numbers, but if it's true, shorting began in earnest because the cost to borrow went from 95% to (a still pretty obscene) 30%. At 95%, to make money on a year-long short the stock would have to drop to pennies. At 30%, it still needs to be a massive dog, but it's doable.

The sudden explosion in shorting caused by this drop in cost to borrow is probably seen as a negative signal and making some investors nervous, causing the stock to drop as they sell it off.

But the cost to borrow doesn't normally drop from 95% to 30% in the absence of a lot of newly-issued shares. So why did this happen? Someone must have made a large number of shares available to borrow - so the question here is who was it and why did they do it?

With the Groupon float so teeny, it's a lot easier to manipulate pricing. This could be completely straightforward and boring, but this could be an institution with advance notice of some favorable information about Groupon setting naive investors up for a classic short squeeze. (Good news comes out, some shorters panic and buy to cover their shorts, increased demand causes prices to rise, more shorters panic... iterate your way to a massive pop and a whole lot of severely-burned shorters.) This would be a good way to compensate for the inevitable drop when the lock-up period expires.

TL;DR - Don't buy or short individual stocks without fully understanding what's going on, and that goes beyond the fundamentals of the business.

narkee• 15 years ago

>The sudden explosion in shorting caused by this drop in cost to borrow is probably seen as a negative signal and making some investors nervous, causing the stock to drop as they sell it off.

I'm still trying to learn how investing and markets work, but isn't this stock manipulation? I mean, if I get a bunch of people to agree to short this stock, and others observe this happening, then the short will come through by virtue of a fall in share price because people saw that I was shorting.

I'm still trying to wrap my head around how markets work, when making observations on the system necessarily changes the system, rendering your original observation invalid.

brosephius2• 15 years ago

Not necessarily. It's completely normal for borrow rates to be ~100% shortly after IPO, it takes a few days for the stock borrow market to settle on a more realistic rate. I wouldn't read much into the drop, and remember that rates different based on your account status and broker, so it's not 30% for everyone.

davidhansen• 15 years ago

Although GRPN is undoubtedly a money-burning scam of a company that is doomed to inevitable failure, it should be noted that the broader market is currently suffering from sovereign debt contagion in Europe and the associated liquidity scrambles. It's not only GRPN.

suking4• 15 years ago

It's outpacing the market drop by about 10X.

scarface5484• 15 years ago

Not if you compare it with other tech stocks that are taking the beating too.

antr6• 15 years ago

Sorry David but that makes no sense. Why aren't US companies with large exposure to Europe falling +10% too? Groupon's exposure to European countries going through the debt crisis is negligible. It's only Groupon

brosephius2• 15 years ago

While there isn't enough trading history to say with confidence, I don't think it's unreasonable to say that GRPN has a pretty high beta to the broader market, so I would expect it to rise (or fall) several times the % of (most of) the rest of the market.

pbreit8• 15 years ago

I downvoted the first clause (unwarranted and baseless), not the second clause.

knowsnothing613• 15 years ago

groupon is a pseudo ponzi scheme. For any market X there exists a high variability for profitable, volume adjusted, daily deals (resource {R}), which people want. After time t, the most desired deals r in resource R are exhausted, leaving behind lesser deals (deals which make substantially less revenue-share). So as t >> T, only less desired deals remain for market X, hugely eroding profits margins, given the high fixed cost to set the deal. So the only way to maintain margins is to enter a new market Y, where r (very profitable daily deals) is in high supply. But eventually this market will be exhausted of r, and margins will again collapse. Therefore Groupon must continually enter new markets to maintain margins, which it has been doing. But there are only a finite number of markets. So eventually Groupon will collapse. This is an intrinsic problem of the daily deals market. Google may overcome it, if it can implement it's near field communication strategy, or automate the bidding process. But other daily deals site, like Living Social, with high employee counts, are bound to fail.

jt11508• 15 years ago

Well said. I call it Grouponzi.

csomar• 15 years ago

You make a good point. But this is only true if all sellers are putting their items in Groupon. In a sane market, there will be only few sellers which want to make daily deals, and also few buyers which want to take them. I don't know the market, though, but this model can work.

AndrewDucker2• 15 years ago

Is there a reason why deals are finite?

Surely a restaurant (for instance) can run a Groupon deal once every few months?

leak• 15 years ago

But I thought the main premise of Groupon is that the deal brings people in and the <fill-in-the-blank> from the business brings people back. I guess a deal could be run again to capture new customers but it's hard to imagine the need if the initial brought in customers and more importantly, brought back customers.

unreal372• 15 years ago

I would argue that the only infinite supply of deals are deals where the profit margin is so high that it supports profit at 50% off plus Groupons cut.

A restaurant does not have 300% profit margins, so long term a restaurant cannot support this model. Only service businesses, or businesses with fixed costs with low variable costs per additional customer, can be on there.

scarface5484• 15 years ago

There are literally thousands of vendors in the city of chicago. It would be years even if someone wants to do a second groupon. I dont get your logic behind market getting exhuasted.

pbreit8• 15 years ago

Since Groupon keeps 10-50 cents of every deal dollar, how is it remotely like a ponzi scheme?

suking4• 15 years ago

Just wait until the lockup expires - that's when the real crash will begin - this is just a teaser.

moreorless• 15 years ago

Absolutely agree with you on this. We all pretty much predicted this on the days leading up to the IPO.

scarface5484• 15 years ago

So this discussion is about " I told you so". Everybody did, so ?

mixmastamyk• 15 years ago

Happen to know when that is?

Q6T46nT668w6i3m• 15 years ago

Next Monday.

suking4• 15 years ago

Usually 6 mos after IPO.

xefer• 15 years ago

How much to the underwriting banks stand to make out of taking this public? Does it matter to them at all if the price falls?

winternett• 15 years ago

How did anyone ever expect to make money off of a coupon company?! News media provided a spin campaign to inflate Groupon's value and everyone flocked to it like white on rice... We haven't learned anything since the real estate bubble popped. The investing masses are 85% sheep.

jinushaun• 15 years ago

The IPO never made any sense for an unprofitable company like Groupon. Seems like the early investors just wanted any exit they could get before the ship sank, like a ponzi scheme.

aritraghosh007• 15 years ago

I am not surprised by this at all. Knew it the day when the top execs were leaving the company at such a stage.

illumen• 15 years ago

If you're standing too close you'll feel the wet of the bubble as it pops.

wavephorm• 15 years ago

Did you just make that up?

joejohnson• 15 years ago

Here's a dynamic graph that shows GRPN's price since IPO: https://www.google.com/finance?client=ob&q=NASDAQ:GRPN

jerf• 15 years ago

Apropos of some of the recent HN discussion of automated story writing, following one of the links on that page led me to http://www.tickrwatch.com/2011/11/abnormal-price-movement-de... , which is a "story" about abnormal price movement in the GRPN stock. It is fun because it does things like discuss the performance of the stock "in the past year" and I particularly enjoy the line "The stock may bounce back to test the 200-day moving average." I find myself wondering what code lies behind that line. Also the last line is a real gem in the field of using lots of words to ultimately say nothing concrete. Automated story writing gone bad.

JanezStupar2• 15 years ago

I have a question.

Since the coupon magic/mania started (everybody and their dog is doing a coupon site). Has there appeared a site/service that disrupts this whole model?

What I mean is - the Service Providers are getting really a shitty value out of GRPN other daily deal sites. Initially GRPN needed loads of cash to get their sales people on the streets and logistics behind this were pretty massive.

But today, I see this market as completely commoditized. Everybody and his dog knows of the daily deal sites. Lately I haven't really met anybody who is doing some kind of services who doesn't know of daily deal sites (and I'm from Slovenia).

So here is my question - is there a sort of service that would take a one time fee/subscription for service providers and let them run their own daily deals.

This way you cut out the middleman and the (expensive) sales people and this would even offer sufficient value to the service providers.

jaxn• 15 years ago

Why would you need fewer sales people to sell this model than to sell Groupon? Restaurant and retail shop owners are not the easiest group to get ahold of, and they are suffering from pitch fatigue as everyone and their brother tries to sell them their daily deal service (that does have some theoretical differentiator).

JanezStupar2• 15 years ago

For one, when your trying to disrupt something doing more of the same everyone is doing is probably not the right way to do it.

Service providers talk, they talk to their customers they talk to their competition - otherwise they provide a shitty service, which doesn't bring in much money, which gets you out of business.

Imagine this conversation:

Provider Alice: Hey I just got my first daily deal out the door. Hope it recuperates the steep cost in the long term.

Provider Bob: Cool, where did you do it?

Provider Alice: Groupon Clone X! Because...

Provider Bob: Nice, I do all my deals on Disruptive service Y, which costs me only a fraction of the Groupon Clone X.

Provider Alice: Motherfucker...

What I'm trying to say is that this market is a race to the bottom and will probably enter the schoolbooks as an example of a dead-end business opportunity.

rplnt• 15 years ago

Just recently, I saw a daily deal to get your own daily deal site. It was either Slovakia or Czech Republic, not sure. So basically yeah, this market is THAT bad.

orijing• 15 years ago

I was surprised to find out that the cost to borrow shares (to short) was still so high. Doesn't that pretty much guarantee that the share price is somewhat above the "fair price"? The cost to borrow is like a tax. The price consumers pay is always above the equilibrium price, which is above the price the sellers get (30% below the buyer price).

What about derivatives? Are there calls and puts on Groupon?

mmaunder2• 15 years ago

The insiders are 144 days into their lockup period of 180 days according to the S1 filing. Morgan Stanley and their preferred clients have made their money and are moving on. So there's not much motivation among heavyweights to keep marketing the stock and there is some paranoia about the looming lock-up expiration.

http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...

rabidsnail2• 15 years ago

Why do companies set the lockup period to be the same for all employees? Do they want a sudden dip in the stock price?

mmaunder2• 15 years ago

The lock-up period is set by the investment bank, in this case Morgan Stanley. Just to be clear, a lock-up period is not required by the SEC. But all investment banks who underwrite IPO's require them to prevent insiders dumping the stock on the first day and hurting the banks clients who the bank convinced to buy the stock.

In general lockup periods are 180 days but I have seen 90 days in rare cases.

I'd imagine giving preferred employees a shorter lock-up would raise hell. Having said that, if you read the S1 it sounds like Morgan Stanley and Groupon have the right to extend executive lock-up by 18 additional days without notice and employee lock-up by 34 days. So there is some differentiation between stockholders.

ojbyrne• 15 years ago

It's weird that that seems to say that the lockup period is from the date of that perspectus, rather than the date of the IPO (which was only 3 weeks ago).

pbreit8• 15 years ago

Yes, it's from the date of the prospectus which was 11/7 and essentially the date of the IPO. You may be thinking of the series of S-1s which came out earlier.

InclinedPlane• 15 years ago

I see that SOX is working quite well in preventing companies with dubious business fundamentals filing IPOs and then running on investment fumes for long enough for key insiders to cash in before they collapse.

Right?

tyrelb• 15 years ago

I'm not sure what SOX ("Auditor Protection Act") has to do with preventing pump & dumps...

unreal372• 15 years ago

The lockup ends 180 days from the date of the prospectus not the date of the IPO. The prospectus is dated June 2, so the lockup ends a week from today. Watch out GRPN.

pbreit8• 15 years ago

I haven't seen this particular agreement but in general the clock starts ticking on the day of the IPO. Basing it on the date of the prospectus makes no sense. There's no guarantee that the IPO will even happen within 180 days.

pbreit8• 15 years ago

The effect of the lockup expiration is generally overblown. Since it's known information, the impact is priced in days or weeks before the actual day. While the expiration results in a temporary imbalance, the stock usually closes at a reasonable price.

kevinlu310• 15 years ago

This is exactly what I expected. I firmly believe Groupon's business model(daily deals) is not a sustainable model, because it's not actually creating any real value but only destroying margin.

VigUi7vv8G23• 15 years ago

Plus there's nothing special about what they do, anyone can come along and do the same thing (Living Social, for example)

darksaga• 15 years ago

I think it's interesting Groupon is giving all these large tech companies a ton of leverage with their future deals.

I can just hear the Google people in their next pitch meeting to some great start-up, "You don't want to end up like Groupon do you?"

xam• 15 years ago

Should have let Google buy them...

VigUi7vv8G23• 15 years ago

That might end up happening, for a lot less...

signalsignal• 15 years ago

If you liked the pump, you'll LOVE the dump.

gaoprea• 15 years ago

Graphs show that the drop started on Monday morning. On Friday afternoon a piece of news appeared that LivingSocial is about to raise a $200M round to strengthen its position as a competitor for Groupon. More recent rumours say that the round may actually be much higher than that, backed by some big names, and the cash would go to the company and not to investors (http://blogs.wsj.com/venturecapital/2011/11/22/livingsocial-...). So this may have influenced investors mood to some degree, maybe enough to make a spark so to speak, which probably was the opportunity that short sellers were expecting to start making big bets. It's just an assumption, but it could make sense.

According to an earlier Reuters analysis, Groupon shares are very attractive for shorting because the company is losing money, had issues with accounting, unproven business model, and may face stiff competition (http://www.reuters.com/article/2011/11/14/us-groupon-shortse...).

r00fus• 15 years ago

My personal experience is that LivingSocial offers are more interesting, and Groupons are often redundant. Most notably, some Groupons look like steals or desperate sales, while others are fairly banal (and useless).

Meanwhile LS's offers are usually fairly constant in terms of discount, and focus on areas I find more interesting.

This must have something to do with the quality of script/process that LS's sales folk are working with.

waterside81• 15 years ago

Insider trading motives aside, this fall in stock price coincides with a general trend I'm seeing in this daily deal market. As a merchant whose had lots of success with these sites, the offers have become better and better over the past few months. Our first Groupon ever was a 50/50 split. Our last deal was 80/20. They offered 70/30, we asked for more, we got it. Maybe that's a sign that their costs have gown down so they have more room to play with.

Personally, I reached deal fatigue and unsubscribed from all of the sites. How many times can you possibly eat out / get a message / get your car detailed?

adambard• 15 years ago

I'm pretty glad about this. I've been shying away from even deals I want, because I know that Groupon is (was) taking 50% of the price and leaving the merchant with what was probably a loss. I might be more likely to purchase them again now.

_Mark• 15 years ago

It's like there is a Groupon deal on Groupon Shares.

umarmung• 15 years ago

Epic Groupon poem, especially for those who do not understand why this is price action is happening!

http://www.thereformedbroker.com/2011/10/30/groupoem/

Here are the first three verses as a teaser:

Gather round, dear investors, and hear all about

The worst IPO that has ever come out

It's hitting this week if the stars align right

But only the foolish would look for a bite

---

For Groupon is now past the peak of its glory

Its promising start a well-known story

Of youthful intensity, vision and zeal

Of crafting the perfect consumer-led deal

---

City by city, Groupon grew like a weed

Positioned as marketing for the small biz in need

Coupons for shoes and coupons for socks

Offers for Lasik and half-off on Crocs

nir• 15 years ago

what it say about google, which offered to buy groupon for $6b?

dhbanes• 15 years ago

...that they offered to pay $5b less than the current market cap?

VigUi7vv8G23• 15 years ago

Hahah. What a ridiculous pump and dump.

eurohacker• 15 years ago

i remember jason fried was having a conversation here on HN about why early investors decided to sell some part of their shares at the time of ipo , trying to say it was a normal thing to do

havent noticed any posts or comments from him in this thread though , kind of tells it ...

is he still hanging in here

Gustomaximus• 15 years ago

Here lie the joys of short selling.

Groupon falls below $20/share

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