Paul Kedrosky reckons that Groupon’s (NASDAQ:GRPN) the worst-performing internet IPO since Netflix (NASDAQ:NFLX), in 2002. He’s wrong: Groupon is doing even worse than Netflix did. It’s now trading at 85% of its IPO price; Netflix, by contrast, was still a tiny bit above its IPO price at this stage in its volatile history. (The chart above shows how Netflix performed in its first year as a public company, compared to its IPO price.)
If Netflix is any indication, Groupon is going to trade significantly lower than its current level before it ever recovers. Netflix went public at $15 per share, at the end of May 2002; on October 9 of that year it closed at just $5.22. Which is $2.61 in current prices, since it subsequently had a 2-for-1 stock split. That makes today’s closing price of $68.50 look positively healthy, the stock’s precipitous recent drops notwithstanding.
What this chart really shows, of course, is just how difficult the stock market’s job of price discovery is. In the early days of a technology company’s life as a public company, the stock price can move quite violently.
And with Groupon we should expect especially violent moves, for two reasons. Firstly, the float is tiny; and secondly, there’s a very loud and vehement class of Groupon bears who are desperate to short the stock and are convinced it’s going to zero. They might even be right. But my main point here is that looking at the Groupon share price on a day-to-day basis is a very good way to go slightly mad.
Groupon’s share price doesn’t reflect new news about the company; it’s more akin to a volatile random-number generator. If it goes down, that doesn’t mean that Groupon is a bad company; and if it goes up, that doesn’t mean Groupon is a good company.
This is one reason why technology companies hate going public: they start getting judged,first and foremost, on the one thing they have no control over, which is their share price. And tech-company share prices in general have been doing very badly in the post-IPO period of late. Why on earth would anybody want to join the likes of Demand Media or Renren, both of which are far below their IPO price? Some companies, like Facebook, have so many shareholders that they’re forced to go public. Others have VC backers twisting their arms. But if you have a choice in the matter, most sensible tech-company CEOs are likely to put off an IPO as long as they possibly can.