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Ahead of lockup expiration, Groupon is a risky bet

Written By: Elizabeth Dexheimer on May 24, 2012 No Comment

Shares of Groupon Inc. have plummeted since the company went public in November 2011.

Next week marks the expiration of Groupon Inc.’s lockup period, when trading restrictions will be removed and company insiders can sell 600 million shares, representing more than 90 percent of all outstanding shares.

Lockups are commonly used when companies go public as a way to control the volume of shares entering the market.

Analysts say the potential flood of new shares next week will have an impact, even though Groupon CEO Andrew Mason said he plans to keep his shares of the company.

“We recognize shares could be negatively impacted around the lockup expiration,” said J.P. Morgan Chase & Co.’s Doug Anmuth. Anmuth presently rates the company as neutral.

“While the float issue is still an overhang,” said Sterne, Agee & Leach analysts Arvind Bhatia and Brett Strauser in a note to clients, “we believe the stock is attractive given it is trading well below its initial public-offering price of $20.”

That’s an understatement.

Shares of Groupon have declined 68 percent since the company went public in November.  On Thursday shares closed at $11.89, down 1.16 percent from the previous day’s close.

The stock traded as low as $9.63 earlier this month after the company revised its 2011 fourth-quarter earnings due to the fact it did not put aside enough money to cover customer refunds.

Joan Lappin, chairman and chief investment officer of Gramercy Capital Management Corp., has concerns about Groupon that run much deeper than the June 1 lockup expiration.

“There is something fundamentally wrong with their business model,” says Lappin. “If I had a business taking in $500 million per quarter I ought to be earning some money.”

Lappin says recurring accounting mishaps are further proof Groupon is a risky investment.

“I wouldn’t pay anything for Groupon stocks,” says Lappin. “In two to three years I don’t think they’ll exist.”

Last week Groupon posted an 89 percent increase in revenue for its first-quarter, to $559 million from $295.5 million the year prior. Analysts cited new customers and reduced marketing costs as key factors driving the jump in sales. The company’s net loss narrowed to $11.7 million from $146.5 million.

But the boost in sales may not be enough to offset concerns about its accounting errors and other challenges. The company has made headlines recently for a lawsuit involving expiration dates of some of its coupons as well as an investigation by the SEC.

So investors beware: Groupon’s problems don’t appear to be going away any day soon.

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