Did Groupon investors just get stuffed with a turkey?
How’s this for a happy Thanksgiving present? Groupon’s stock price sunk Wednesday to the lowest point since its initial public offering earlier this month: closing at $16.96 a share, well below its $20 IPO share price. Earlier in the day, Groupon’s share price hit $16.71, the lowest point in its short history — a 46 percent drop from the $31.14 price it reached the day it hit the stock market on Nov. 4:
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To be fair, the entire stock market has slumped in recent days: The NASDAQ composite index is now down 8.16 percent from where it was a week and a half ago, and the Dow Jones Industrial Index went down by 7.37 percent during that same period. But Groupon’s decline — by the end of Wednesday it was down 30 percent from Nov. 14 — outpaced both of those metrics significantly:
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As we’ve written before, monitoring the ups and downs of daily stock price changes is a bit of a horse race — and it’s also antithetical to the supposed purpose of the stock market, which is to allow companies to build toward long-term health and stability. But many folks in the tech and finance fields have been critical of Groupon’s valuation ever since it laid out specific plans to go public back in June, so there’s naturally buzz (and a healthy bit of schadenfreude) around its dramatic market cap decline. It’s important to remember, though, that while Groupon’s plummeting share price is certainly notable at the moment, now that it’s a publicly traded company it won’t be possible to truly judge whether it’s a stock market success or failure until it can be evaluated with a much longer lens.
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It was obvious to anybody who has been following Groupon that their business model was a pyramid scheme. Each round of investment was larger than the previous one, and used to pay off the earlier investors in large part, as well as to temporarily plug their ever growing losses.
A company can have the hugest revenues in the world and not turn a profit. The two are not the same.
This reminds me of Zynga, who similarly goes through rounds of ever growing investment. They too allegedly have huge revenues, yet in recent disclosure admitted they’ve never had a profit greater than $13M – at their best ever quarter. Is it another IPO scam in the making? Potentially. It’s not a secret that Mark Pinkus has been previously involved in many controversial startups, and then there are his public admissions of scamming and spamming Zynga users (reported in TechCrunch).
Yet tech magazines keep pumping up Zynga, and rarely follow-up on the gap between their stated profits and actual ones. I can’t see how history won’t repeat itself here.
Groupon is a sinking ship, it’s been obvious for a while. They provide no long-term value to merchants, and the short-term value is questionable at best. Try to find merchants with a positive Groupon experience – they are few and far between. There should be no sympathy for anyone who invested in the public market, they did not do their homework. In the last private round before the IPO, $900M of the $1B raised was used to pay earlier investors. If that doesn’t stink like a ponzi scheme, I don’t know what does. In the end, Groupon will do more harm than good to the entire industry, it’s a real shame. I just wonder who’s more at fault – Groupon for scamming investors, the media “professionals” for eating up the Groupon PR and pushing it out to the public, or the investors for reading a few articles and figuring it was a homerun. Regardless of fault, it’s sad to see so many losers go down with this disaster. The only winners are the early investors, and most of them already laughed their way to the bank.