Groupon’s bull run is over

By November 24, 2011Exits

For some time now Groupon has been the company that everyone loves to hate, but despite that its valuation has kept on climbing. 

Until this week.

Groupon’s share price has fallen 35% over the last three days, closing at $16.96 last night – some 15% lower than its IPO price of $20, and nearly 40% off its $28 peak.  This has not been a one off affair either, but rather three consecutive days of 10%+ falls.  (I actually thought about writing this post yesterday, after the second day of falls.)

A quick recap on the common arguments against Groupon:

  • the business model is inherently unprofitable – largely due to an ongoing requirement for high marketing costs
  • the service isn’t good for merchants, and many experience problems – this week’s bad news story was about a UK cup cake maker who got her sums wrong and ended up losing money on her Groupon promotion
  • their business practices are questionable – e.g. aggressive selling tactics and creative use of accounting standards (they had to restate revenues in the run up to their IPO)
  • only 5.5% of the shares were listed at the IPO resulting in allegations that the float was kept small to manipulate the share price (micro-economics tells us that reducing supply results in higher prices, assuming constant demand)

Earlier this month I wrote a post with the title While the exits keep coming the party will keep rolling and flyingkiwiguy left a comment this morning that was simply a link to a Forbes article about Groupon’s share price decline.  His unwritten point was that after this fall it is less likely that the other tech companies in the IPO pipeline will get out, the exits will stop and the tech bubble will come to an end.

I think it is too early to make that call definitively, but I think he may well be right.  Gawker wrote yesterday that The tech bubble just popped, pointing out that the 41 tech companies which went public this year are down 13% collectively with LinkedIn the only big tech IPO that is in positive territory.  (LinkedIn is up 53%, whilst Yandex, Pandora, Demand Media, RenRen and of course Groupon are all below their offering prices.)

Unless these recent IPOs see come improvement I think we will see a knock on decline in M&A and venture valuations.

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  • Interesting thought … but good companies with real revenue performance and strong business models will still get away. A rogue play like Groupon should not be able to taint the whole market, I think enough is known about them for people to see through the hype. There will always be companies trying to ride the wave but eventually the chickens come home to roost.The gorillas in the park that are still buiding massive revenue streams have yet to make their moves and may not even in 2012. I think once they play their hand and get a market reaction then we can really judge whether the game is over for this cycle. Still will not be surprised if the European VCs use this commentary as an opportunity to tighten their term sheets.  

  • 🙂 you’re getting cynical Dmaon…