Groupon Loses the IPO Gamble: Is Facebook Next?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What a weekend Andy (CEO Andrew Mason) and the management team at Groupon (NASDAQ: GRPN) must have had. The release of an additional 600 million shares – as per the IPO specs – couldn’t have come at a worse time. The company was just starting to show signs of life after a decent Q1 earnings announcement in mid May. For an instant there it appeared investors were moving past the financial reporting snafus from earlier in the year – a decent quarter will do that. Then the other shoe fell.
The question is why? This wasn’t a surprise – in fact it’s downright commonplace for IPOs to issue what amounts to nothing more than a teaser offering. In Groupon’s case they teased the market with about 6% of their outstanding shares and insiders patiently waited to cash in. The real question for investors is what will those same insiders do with their newfound freedom. Safe to say you’ll see a number of smaller lots being sold by Groupon employees – that too is pretty much the norm. But what about Andy and the team? That’s what shareholders need to keep an eye on.
If the Groupon management team has any common sense they won’t touch those shares – nary a one – at least for a while. The first SEC filing noting a substantial sale of shares on the open market by a Groupon bigwig will make the current stock price feel like the good old days – rather than 50%+ less than the $20 a share IPO level.
Today’s SEC registration for an additional 10 million shares for the company’s employee stock purchase plan – while a drop in the bucket compared to the 600 million released on Friday – is sort of like pouring salt on an already painful wound. Though it will be interesting to see how insiders react. Is the current price a bargain as seen the by the folks in the know – the rank and file employees? Maybe not a defining moment, but it will be intriguing as a gauge of employee morale and long-term outlook.
As noted earlier issuing a fraction of outstanding shares during an IPO is what companies do. Fewer shares, more demand – it’s that whole capitalism thing at work. But as Groupon is finding out – the hard way - it only works in your favor when investors remain enamored with the company story. And even more importantly are ga-ga even after a quarter or two of solid financial results.
Need an example? Facebook (NASDAQ: FB) isn’t too far away from finding out exactly how Groupon feels. The Facebook debut consisted of a mere 18% of shares outstanding, with 2.1 billion still waiting to hit the market on a laddered scheduled. The release of restrictions begins about three months after the IPO (a little over two months from now), and concludes 181 days from the "big day."
If the 421 million shares Facebook has on the open market now can’t withstand selling pressure, what’s going to happen when the availability of 2+ billion more inundate the market? The fact insiders certainly aren’t required to sell won’t matter – as Groupon shareholders have found out the hard way. If you're not long Facebook now you'd be wise to learn from Groupon's pain and wait until the remaining IPO hangover wears off.
What Now for Groupon?
Once investors get back to fundamentals – and they (eventually) will - they'll find Groupon’s run-up following the May 14 earnings call was warranted for a couple of reasons. The SmartDeals technology is taking hold with Groupon clients, allowing them to better target their offerings, and should boost international sales (even more) once it’s available. And – surprisingly – the company is benefiting from continued growth in the North American market.
The long-term concerns remain the same – and it’s not the release on sell restrictions – it’s competition. As is always the case for the first one at the dance they had the floor all to themselves. Now with Amazon’s (NASDAQ: AMZN) LivingSocial making monthly visitor inroads and Google (NASDAQ: GOOG) pushing their Google Offers, the heavy hitters are at the door.
For investors keep a close eye on insider selling from Andy and the team going forward – that will be the true indicator of management’s confidence in the model and prospects for continued growth.
timbrugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and Google. Motley Fool newsletter services recommend Amazon.com and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.