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Shares of Groupon (Nasdaq: GRPN ) plunged 9.3% on Friday, hitting a new all-time low of $9.53 a share. The daily-deals site has attracted fierce criticism since going public last November. That's because a series of missteps by the young company, including multiple accounting issues, crippled investor confidence. However, the latest dip came as the Chicago-based company's so-called IPO lockup ended.
After a company's initial public offering, insiders and employees are prohibited from selling shares for a specified period of time, known as the lockup period. Typically, when the lockup expires, the paper millionaires cash in their chips -- ultimately flooding the market with additional shares. Given the nature of this process, it isn't unusual for a stock to tumble once the post-IPO lockup is lifted. Just look at shares of Demand Media (NYSE: DMD ) .
The company's made a name for itself as the publisher behind well-known websites including eHow.com and Livestrong.com. Yet when the 180-day lockup period ended last July, shares of Demand Media fell 7.45% to $10.69 a share. Today the media stock trades at $9. When Pandora's (NYSE: P ) lock-up expired in December of last year, it also declined -- losing 5% of its value. The Internet music-streaming stock continued to fall from its IPO highs of more than $25 a share to where it trades today at just under $10.
LinkedIn (Nasdaq: LNKD ) lends yet another example of a lock-upset. When the social-networking site's lockup expired last November, shares slid to their lowest point in five months, to $70 a share. However, now with hindsight, it's clear that investors who bought shares of LinkedIn on the post-lockup dip proved wise -- the stock currently trades at around $90 a share.
But I don't think Groupon will enjoy the same fate as LinkedIn and climb to new highs in the months ahead. Shares of the deal-of-the-day site have lost more than 50% of their value since going public last year. And I'm afraid the stock will continue on this trajectory.
Groupon on sale
I hate to seem bitter, but I'm not yet ready to forgive and forget Groupon's blatant disregard for its shareholders. Who can ignore the stunt management pulled in its first quarter as a publicly traded company? For those who need a refresher: Groupon was forced to restate earnings after it wrongly inflated its quarterly revenue by $14.3 million and slid various operating costs under the rug.
You would think Groupon would have learned its lesson after the pre-IPO investigation into its misleading S-1 filing. Nope. Management continues to put its needs before the needs of its shareholders. But tricky accounting practices and a high volume of insider selling aren't the only factors giving investors pause.
Another problem is that the business model is relatively simple to replicate. This has allowed for other big names such as Microsoft, Amazon.com (Nasdaq: AMZN ) , and Google to enter the space with discount programs of their own. Even privately held LivingSocial is getting help from the big guys. Last year, Amazon invested $175 million in the rival deals site. Both LivingSocial and Groupon cater to local businesses. However, if Groupon can't run its own business, how is it supposed to compete with other, bigger businesses?
While I love a good deal, I can't justify buying the stock here despite its fire-sale price. At this point, I don't have any faith in Groupon's core business, which is why I'm sticking with my CAPScall of underperform. The company's problems are more than mere growing pains. There are plenty of other, more profitable, opportunities available to investors, which don't carry the heavy load of risk that currently weighs on shares of Groupon.
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