

Groupon falls below $20/share - ila
http://finance.yahoo.com/q?s=GRPN

======
marvin
Not going to make any predictions for the future here...but whether this
should be characterized as a crash or not (at the present moment a decline
from 24.5 to 18 over two days, about 27%) is a semantic question and open for
discussion.

This is actually a very interesting question. Keeping the specifics of
Groupon's business out of the equation at the moment, the pricing of growth
companies is an incredibly inexact science. If most of these companies were
publicly traded and liquid, you'd expect fluctuations of at least 30% a day
during volatile periods. Just imagine the atmosphere in an average startup:
One day you're going to conquer the world, the next day you're
doomed...depending on prevailing conditions and random issues that pop up.
This "atmosphere" (or expectation) carries over to the people who are
attempting to determine the market value of your company. That's what the
stock market is trying to: from moment to moment, determine the exact market
value of each company.

The market still hasn't mastered pricing stocks like these (and it probably
never will, potentially extreme growth stocks like technology startups
practically by definition have huge volatility), but it is getting better.
Look at the skeptics who try to price startups on revenue/profits alone.
Obviously a bunch of really smart people in a garage with a sound plan but no
revenues are worth more than $0. Some of these groups are bound to strike it
rich, so average across all of them and you'll get a positive (perhaps very
large) number. This is why we see large valuations of early-stage startups.
But how large should the number be? The exact value of a company is the
present-value adjusted worth of all its future profits. Determining this
number is what everyone who does value-based investing attempts to do.

But finding this number is impossible, especially if you're investing in a
very young company. I think that a lot of tech investors today are attempting
to average the value across a large number of promising companies, instead of
looking too much at the specifics of a single one.

Due to the inherent volatility, investing in potentially extreme growth
companies like Groupon and LinkedIn is a _hugely_ risky business, unless you
happen to be a genius who sees something about their business that no one else
does. There were probably geeks who made these kinds of observations about
Google in its early history.

~~~
scottkduncan
It is certainly an inexact science, but in this case the insiders tipped their
hand ahead of the IPO about what they thought of Groupon's valuation. That the
last pre-IPO raise went almost exclusively towards cashing out insiders and
early investors rather than shoring up a pretty serious capital problem
obviated the need for me to do speculative modeling of discounted cash flows.
More so than any of the other recent high profile IPOs, this one just looked
like passing the bag to folks with far less information about the company's
actual prospects.

~~~
harryh
That's one way of looking at it.

Another way of looking at it is to agree with marvin's assessment that tech
companies (like Groupon) are inherently volatile and for any individual it
makes sense to diversify. The people that cashed out didn't sell all of their
holdings, or even a majority. They sold a relatively small portion so that
their entire net worth wasn't locked up in an extremely volatile stock. That
seems pretty reasonable to me. They'd (at least in my opinion) have been fools
to do otherwise.

~~~
scottkduncan
I definitely agree that it can make a lot of sense for founders and early
employees to cash out a portion of their holding so their entire net worth
isn't locked up in one company. Other threads on HN have covered how it can
better help align founders' incentives with those of investors, likely leading
to better long-term results. With co-founders cashing out a partial share,
they can focus more on long-term growth rather than worrying about protecting
their value in the short-term. That is good for everyone.

From my admittedly superficial knowledge of the Groupon example, it doesn't
seem like that is what happened with their previous capital raises. They've
distributed about 80% of what they raised from their Series C and D rounds to
early investors at a time when the company has serious capital concerns.
Lefkofsky took about $400 M from the last pre-IPO round and is reportedly
focusing on other ventures now.

I don't blame any of them for taking the money (as you say, they'd be fools to
do otherwise), but all of this makes me sure that Groupon is not a company I
want to put my money in.

------
mmaunder
The insiders are 144 days into their lockup period of 180 days according to
the S1 filing. Morgan Stanley and their preferred clients have made their
money and are moving on. So there's not much motivation among heavyweights to
keep marketing the stock and there is some paranoia about the looming lock-up
expiration.

[http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...](http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm)

~~~
rabidsnail
Why do companies set the lockup period to be the same for all employees? Do
they want a sudden dip in the stock price?

~~~
mmaunder
The lock-up period is set by the investment bank, in this case Morgan Stanley.
Just to be clear, a lock-up period is not required by the SEC. But all
investment banks who underwrite IPO's require them to prevent insiders dumping
the stock on the first day and hurting the banks clients who the bank
convinced to buy the stock.

In general lockup periods are 180 days but I have seen 90 days in rare cases.

I'd imagine giving preferred employees a shorter lock-up would raise hell.
Having said that, if you read the S1 it sounds like Morgan Stanley and Groupon
have the right to extend executive lock-up by 18 additional days without
notice and employee lock-up by 34 days. So there is some differentiation
between stockholders.

~~~
kingcub
Why is that lockup not 34 days for execs and 18 days for employees?

~~~
yuvadam
Simple, because the execs are the one who negotiate the lockup, not the
employees.

------
gaoprea
Graphs show that the drop started on Monday morning. On Friday afternoon a
piece of news appeared that LivingSocial is about to raise a $200M round to
strengthen its position as a competitor for Groupon. More recent rumours say
that the round may actually be much higher than that, backed by some big
names, and the cash would go to the company and not to investors
([http://blogs.wsj.com/venturecapital/2011/11/22/livingsocial-...](http://blogs.wsj.com/venturecapital/2011/11/22/livingsocial-
waiting-on-more-big-shoes-to-drop-to-close-round/)). So this may have
influenced investors mood to some degree, maybe enough to make a spark so to
speak, which probably was the opportunity that short sellers were expecting to
start making big bets. It's just an assumption, but it could make sense.

According to an earlier Reuters analysis, Groupon shares are very attractive
for shorting because the company is losing money, had issues with accounting,
unproven business model, and may face stiff competition
([http://www.reuters.com/article/2011/11/14/us-groupon-
shortse...](http://www.reuters.com/article/2011/11/14/us-groupon-shortsellers-
idUSTRE7AD2E820111114)).

~~~
r00fus
My personal experience is that LivingSocial offers are more interesting, and
Groupons are often redundant. Most notably, some Groupons look like steals or
desperate sales, while others are fairly banal (and useless).

Meanwhile LS's offers are usually fairly constant in terms of discount, and
focus on areas I find more interesting.

This must have something to do with the quality of script/process that LS's
sales folk are working with.

------
knowsnothing613
groupon is a pseudo ponzi scheme. For any market X there exists a high
variability for profitable, volume adjusted, daily deals (resource {R}), which
people want. After time t, the most desired deals r in resource R are
exhausted, leaving behind lesser deals (deals which make substantially less
revenue-share). So as t >> T, only less desired deals remain for market X,
hugely eroding profits margins, given the high fixed cost to set the deal. So
the only way to maintain margins is to enter a new market Y, where r (very
profitable daily deals) is in high supply. But eventually this market will be
exhausted of r, and margins will again collapse. Therefore Groupon must
continually enter new markets to maintain margins, which it has been doing.
But there are only a finite number of markets. So eventually Groupon will
collapse. This is an intrinsic problem of the daily deals market. Google may
overcome it, if it can implement it's near field communication strategy, or
automate the bidding process. But other daily deals site, like Living Social,
with high employee counts, are bound to fail.

~~~
AndrewDucker
Is there a reason why deals are finite?

Surely a restaurant (for instance) can run a Groupon deal once every few
months?

~~~
unreal37
I would argue that the only infinite supply of deals are deals where the
profit margin is so high that it supports profit at 50% off plus Groupons cut.

A restaurant does not have 300% profit margins, so long term a restaurant
cannot support this model. Only service businesses, or businesses with fixed
costs with low variable costs per additional customer, can be on there.

~~~
pbreit
Restaurants have very high fixed costs and 60-70% margins (basically, the
food) so even with a 50% cut to Groupon, they can usually make it work. With a
20-40% cut to Groupon, they can make it work without much deal overage or
return customers.

------
JanezStupar
I have a question.

Since the coupon magic/mania started (everybody and their dog is doing a
coupon site). Has there appeared a site/service that disrupts this whole
model?

What I mean is - the Service Providers are getting really a shitty value out
of GRPN other daily deal sites. Initially GRPN needed loads of cash to get
their sales people on the streets and logistics behind this were pretty
massive.

But today, I see this market as completely commoditized. Everybody and his dog
knows of the daily deal sites. Lately I haven't really met anybody who is
doing some kind of services who doesn't know of daily deal sites (and I'm from
Slovenia).

So here is my question - is there a sort of service that would take a one time
fee/subscription for service providers and let them run their own daily deals.

This way you cut out the middleman and the (expensive) sales people and this
would even offer sufficient value to the service providers.

~~~
jaxn
Why would you need fewer sales people to sell this model than to sell Groupon?
Restaurant and retail shop owners are not the easiest group to get ahold of,
and they are suffering from pitch fatigue as everyone and their brother tries
to sell them their daily deal service (that does have some theoretical
differentiator).

~~~
JanezStupar
For one, when your trying to disrupt something doing more of the same everyone
is doing is probably not the right way to do it.

Service providers talk, they talk to their customers they talk to their
competition - otherwise they provide a shitty service, which doesn't bring in
much money, which gets you out of business.

Imagine this conversation:

Provider Alice: Hey I just got my first daily deal out the door. Hope it
recuperates the steep cost in the long term.

Provider Bob: Cool, where did you do it?

Provider Alice: Groupon Clone X! Because...

Provider Bob: Nice, I do all my deals on Disruptive service Y, which costs me
only a fraction of the Groupon Clone X.

Provider Alice: Motherfucker...

What I'm trying to say is that this market is a race to the bottom and will
probably enter the schoolbooks as an example of a dead-end business
opportunity.

~~~
sunchild
I think the question boils down to this: Who will be the first to offer
merchants a more favorable cut than 50/50? Or who will offer to let the
merchants hold the cash? It's an inevitable race to zero for the coupon
providers.

------
carbocation
Cost of borrow went from like 95% to 30% over the past two days so shorting
recently began in earnest, it seems.

~~~
gyardley
Haven't checked the numbers, but if it's true, shorting began in earnest
_because_ the cost to borrow went from 95% to (a still pretty obscene) 30%. At
95%, to make money on a year-long short the stock would have to drop to
pennies. At 30%, it still needs to be a massive dog, but it's doable.

The sudden explosion in shorting caused by this drop in cost to borrow is
probably seen as a negative signal and making some investors nervous, causing
the stock to drop as they sell it off.

But the cost to borrow doesn't normally drop from 95% to 30% in the absence of
a lot of newly-issued shares. So why did this happen? Someone must have made a
large number of shares available to borrow - so the question here is _who was
it_ and _why did they do it_?

With the Groupon float so teeny, it's a lot easier to manipulate pricing. This
could be completely straightforward and boring, but this could be an
institution with advance notice of some _favorable_ information about Groupon
setting naive investors up for a classic short squeeze. (Good news comes out,
some shorters panic and buy to cover their shorts, increased demand causes
prices to rise, more shorters panic... iterate your way to a massive pop and a
whole lot of severely-burned shorters.) This would be a good way to compensate
for the inevitable drop when the lock-up period expires.

TL;DR - Don't buy or short individual stocks without fully understanding
what's going on, and that goes beyond the fundamentals of the business.

~~~
narkee
>The sudden explosion in shorting caused by this drop in cost to borrow is
probably seen as a negative signal and making some investors nervous, causing
the stock to drop as they sell it off.

I'm still trying to learn how investing and markets work, but isn't this stock
manipulation? I mean, if I get a bunch of people to agree to short this stock,
and others observe this happening, then the short will come through by virtue
of a fall in share price because people saw that I was shorting.

I'm still trying to wrap my head around how markets work, when making
observations on the system necessarily changes the system, rendering your
original observation invalid.

~~~
pemulis
That's just the inverse of going long on a stock: Other people observe you
buying up many shares of a stock, causing the price to go up, which in turn
causes your long bet to come through. The degree that this changes the market
depends on how well-respected a trader you are.

For example, if Warren Buffett invests in a company, that company's stock
generally rises. That's why Warren Buffett was able to get sweetheart deals
when he made short-term loans to Goldman, Sachs and Bank of America recently.
They were willing to pay him billions of dollars just for his imprimatur.
Buffett received options to buy shares of their stock at the much lower, pre-
bump price.

It's not really stock manipulation, though. If you're big enough, or respected
enough, you have to expect your trades to move the market.

------
waterside81
Insider trading motives aside, this fall in stock price coincides with a
general trend I'm seeing in this daily deal market. As a merchant whose had
lots of success with these sites, the offers have become better and better
over the past few months. Our first Groupon ever was a 50/50 split. Our last
deal was 80/20. They offered 70/30, we asked for more, we got it. Maybe that's
a sign that their costs have gown down so they have more room to play with.

Personally, I reached deal fatigue and unsubscribed from all of the sites. How
many times can you possibly eat out / get a message / get your car detailed?

~~~
adambard
I'm pretty glad about this. I've been shying away from even deals I want,
because I know that Groupon is (was) taking 50% of the price and leaving the
merchant with what was probably a loss. I might be more likely to purchase
them again now.

------
jinushaun
The IPO never made any sense for an unprofitable company like Groupon. Seems
like the early investors just wanted any exit they could get before the ship
sank, like a ponzi scheme.

------
umarmung
Epic Groupon poem, especially for those who do not understand why this is
price action is happening!

<http://www.thereformedbroker.com/2011/10/30/groupoem/>

Here are the first three verses as a teaser:

 _Gather round, dear investors, and hear all about

The worst IPO that has ever come out

It's hitting this week if the stars align right

But only the foolish would look for a bite

\---

For Groupon is now past the peak of its glory

Its promising start a well-known story

Of youthful intensity, vision and zeal

Of crafting the perfect consumer-led deal

\---

City by city, Groupon grew like a weed

Positioned as marketing for the small biz in need

Coupons for shoes and coupons for socks

Offers for Lasik and half-off on Crocs_

------
winternett
How did anyone ever expect to make money off of a coupon company?! News media
provided a spin campaign to inflate Groupon's value and everyone flocked to it
like white on rice... We haven't learned anything since the real estate bubble
popped. The investing masses are 85% sheep.

------
signalsignal
If you liked the pump, you'll LOVE the dump.

------
joejohnson
Here's a dynamic graph that shows GRPN's price since IPO:
[https://www.google.com/finance?client=ob&q=NASDAQ:GRPN](https://www.google.com/finance?client=ob&q=NASDAQ:GRPN)

~~~
jerf
Apropos of some of the recent HN discussion of automated story writing,
following one of the links on that page led me to
[http://www.tickrwatch.com/2011/11/abnormal-price-movement-
de...](http://www.tickrwatch.com/2011/11/abnormal-price-movement-detected-
nasdaq.html) , which is a "story" about abnormal price movement in the GRPN
stock. It is fun because it does things like discuss the performance of the
stock "in the past year" and I particularly enjoy the line "The stock may
bounce back to test the 200-day moving average." I find myself wondering what
code lies behind that line. Also the last line is a real gem in the field of
using lots of words to ultimately say nothing concrete. Automated story
writing gone bad.

------
orijing
I was surprised to find out that the cost to borrow shares (to short) was
still so high. Doesn't that pretty much guarantee that the share price is
somewhat above the "fair price"? The cost to borrow is like a tax. The price
consumers pay is always above the equilibrium price, which is above the price
the sellers get (30% below the buyer price).

What about derivatives? Are there calls and puts on Groupon?

------
xefer
How much to the underwriting banks stand to make out of taking this public?
Does it matter to them at all if the price falls?

------
darksaga
I think it's interesting Groupon is giving all these large tech companies a
ton of leverage with their future deals.

I can just hear the Google people in their next pitch meeting to some great
start-up, "You don't want to end up like Groupon do you?"

------
kevinlu310
This is exactly what I expected. I firmly believe Groupon's business
model(daily deals) is not a sustainable model, because it's not actually
creating any real value but only destroying margin.

~~~
VigUi7vv8G2
Plus there's nothing special about what they do, anyone can come along and do
the same thing (Living Social, for example)

------
aritraghosh007
I am not surprised by this at all. Knew it the day when the top execs were
leaving the company at such a stage.

------
Gustomaximus
Here lie the joys of short selling.

------
xam
Should have let Google buy them...

~~~
VigUi7vv8G2
That might end up happening, for a lot less...

------
nir
what it say about google, which offered to buy groupon for $6b?

~~~
dhbanes
...that they offered to pay $5b less than the current market cap?

------
illumen
If you're standing too close you'll feel the wet of the bubble as it pops.

~~~
wavephorm
Did you just make that up?

------
_Mark
It's like there is a Groupon deal on Groupon Shares.

------
VigUi7vv8G2
Hahah. What a ridiculous pump and dump.

------
suking
Just wait until the lockup expires - that's when the real crash will begin -
this is just a teaser.

~~~
mixmastamyk
Happen to know when that is?

~~~
suking
Usually 6 mos after IPO.

------
davidhansen
Although GRPN is undoubtedly a money-burning scam of a company that is doomed
to inevitable failure, it should be noted that the broader market is currently
suffering from sovereign debt contagion in Europe and the associated liquidity
scrambles. It's not _only_ GRPN.

~~~
antr
Sorry David but that makes no sense. Why aren't US companies with large
exposure to Europe falling +10% too? Groupon's exposure to European countries
going through the debt crisis is negligible. _It's only Groupon_

~~~
brosephius
While there isn't enough trading history to say with confidence, I don't think
it's unreasonable to say that GRPN has a pretty high beta to the broader
market, so I would expect it to rise (or fall) several times the % of (most
of) the rest of the market.

~~~
antr
Completely agree, the beta is well above 2 (my guess)

------
eurohacker
i remember jason fried was having a conversation here on HN about why early
investors decided to sell some part of their shares at the time of ipo ,
trying to say it was a normal thing to do

havent noticed any posts or comments from him in this thread though , kind of
tells it ...

is he still hanging in here

