Groupon (GRPN) is finally getting ready for its IPO. It will be selling roughly 30M shares and raising $540M. All the updated details can be found in the S1 filing.
I would encourage any potential investors to read through and understand what it is you will be investing in. Looking at three recent hot IPOs, Linkedln (LNKD), Zillow (Z) and Pandora Media (P) should be a good indication what is likely to happen here. Linkedln IPOed at $45 and traded as high as $92. It quickly retreated to $65 and has hit a high of $122 and is currently trading at $87. Zillow IPOed at $20 and quickly popped as high as $44. It is now trading at $27. Pandora Media IPOed at $16 and went as high as $26 and now sits around $15. Most investors trying to get in early paid a high price and quickly saw any potential profit go away.
Reading through the S1 here are a few of the warning flags I have seen:
After conversion of all types of shares the number of outstanding shares will be more than 630M shares. Eventually many of these shares will become free trading and the cost basis for early investors will be pennies on the dollar compared with the current price.
The barrier to entry does not exist. It has no Intellectual Property to protect it. There is a reason Google (GOOG) has been buying up IP like it is candy before Halloween. From the S1.a.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business. We expect competition in e-commerce generally, and group buying in particular, to continue to increase because there are no significant barriers to entry. A substantial number of group buying sites that attempt to replicate our business model have emerged around the world.
Here is what they claim their main advantage is. The problem being this is Intellectual Property that is going to be highly contested in the future. From the S1:
Our Advantage :Customer experience and relevance of deals. We are committed to providing a great customer experience and maintaining the trust of our customers. We use our technology and scale to target relevant deals based on individual subscriber preferences.
With the small amount of shares being initially released and the usual amount of euphoria created by the 14 firms that are underwriting the company it seems likely that the stock will rise significantly from its initial price. Unfortunately the only investors who are making a killing are the early investors and those buying on the initial IPO day are highly unlikely to make money. Given the current competition and the slowing growth rate in this area based on market saturation, the long-term prospects are very risky. I will not be surprised if some analysts put a sell rating on the shares after the initial pop, just like they did with the Pandora Media IPO. Why Groupon did not take Google’s generous $6B offer a year ago still remains a mystery and it will be interesting to see if it made the right decision a few years down the road.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
