The underwriters for Groupon's Nov. 4 initial public offering were finally able to begin coverage of the daily-deal site's stock on Wednesday, and it wasn't exactly a lovefest.
From the New York Times DealBook:
Six of the company’s underwriters ... stamped Groupon’s stock with neutral or hold ratings. Five issued bullish, or buy, calls. Their price targets ranged from $21 to $29. The lukewarm reception dragged on shares of Groupon (NASDAQ: GRPN), as the stock tumbled 3.3 percent to close Wednesday at $22.55.
Fortunately for the underwriters, led by Morgan Stanley, Goldman Sachs and Credit Suisse Group, they won't have to give back any of the more than $40 million in fees they collected for Groupon's IPO, which was priced at $20 a share and which reached as high as $31.14 on the first day of trading.
But their pimp work is done, and now it's time for the underwriters to keep it real.
Well, some of them. Wall Street's most shameless huckster, Goldman Sachs, set a target price of $29 a share -- or 81% above the low end of the $16 to $18 price range established by the underwriters prior to the IPO (subsequently bumped up to $20 on the eve of the offering).
Goldman says the money-losing, growth-slowing company in an industry with low barriers to entry represents "the key to unlocking the massive local advertising market with which the Internet has long struggled," DealBook quotes. Yeah, them and their many competitors who aren't bleeding as much cash.
Morgan Stanley and Credit Suisse were more circumspect, beginning coverage with neutral ratings, though Morgan's target price was set at $27, not much below Goldman's.
Groupon's challenges certainly were no secret before the IPO, but let's face it, that's only because the Securities and Exchange Commission 1) requires companies to spell out risk factors in their S-1 filings, and 2) forced Groupon to clarify its accounting procedures last summer after the company was caught overstating revenue by 50% (it gives back half of the sales to the merchants who do business with it).
But, you know, we don't need government oversight of Wall Street or anything.
Of course, risks almost always are glossed over during pre-IPO road shows. There's a reason it's called a show.
Groupon's competitive problems are many. First, it's easy for other companies such as LivingSocial to enter the daily-deals market. Internet access and a sales staff will pretty much do it. That means even higher marketing costs for Groupon if it wants to continue growing, and it's already spending a ton.
Second, a growing number of merchants complain that they actually have lost money on Groupon deals. Competitors can undercut Groupon by offering better terms.
Third, a saturated daily-deals market runs the risk of creating "daily-deal fatigue" among consumers. People who earlier this year may have eagerly awaited their daily Groupon email eventually could just begin ignoring them. Money's still tight for many consumers, and spending nothing is a better deal than getting 50% off something you might not buy in the first place.
Shares of Groupon were up as high as 4.2% Thursday to 23.50, because some people never learn.