Groupon stock hot, skeptics plenty
Analysts wary of accounting, copycats
NEW YORK – Groupon’s stock sizzled in its public debut Friday despite concerns about its accounting practices ahead of an initial public offering and doubts about the viability of its business model.
The first-day pop for the pioneer of online group discounts was largely expected, though. Not even a gain of about $4 billion in market value – to nearly $17 billion – could erase lingering questions about its long-term prospects.
After pricing above its expected range on Thursday, at $20, Groupon’s stock rose $6.11, or 31 percent, to close Friday at $26.11. Earlier in the day, it traded as high as $31.14.
Still, analysts remain worried about the risks concerning the company, especially as the stock price increases.
“Until investors see the full profit model unfold over time, expect this stock to be highly volatile,” said Kathleen Shelton Smith, principal of Renaissance Capital, which operates IPOhome.com. “The first day of trading is typically more about supply and demand. Fundamentals will take over in the long run.”
Groupon makes money by sending out frequent emails to subscribers offering a chance to buy discount deals. The company takes a cut of what people pay and gives the rest to the merchant.
Because the model is easy to replicate, it has spawned many copycats after its 2008 launch, from startups such as LivingSocial to established companies such as Google and Amazon.
Groupon has the advantage of being first. This has meant brand recognition and investor demand, as evidenced by its strong public debut.
Nonetheless, Chicago-based Groupon Inc. has faced scrutiny about its high marketing expenses, enormous employee base and the way it accounted for revenue.
For some longtime IPO watchers, Groupon’s ascent is reminiscent of the late 1990s tech boom – and bust.
“The retail investors buying the stock, I don’t think they were around in the 2000 dot-com bust. I don’t think they have a historical perspective of what happens over time,” said Francis Gaskins, president of IPOdesktop.com. “They are buying based on emotion.”
Though critics abound, not everyone believes Groupon is a disaster waiting to happen.
“They have a real business. They can really make money. They have a really large first-mover advantage,” Wedbush analyst Michael Pachter said. “The downside is that it’s not hard to do what they do.”