Groupon's Plunge Shows the Risk and Reward of High-Growth IPOs

The Dow Jones Industrial Average isn't going anywhere today, but Groupon's plunge tells us a lot about the risk and reward of tech IPOs.

Feb 21, 2014 at 12:00AM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

The tepid week on Wall Street continues, with the Dow Jones Industrial Average (DJINDICES:^DJI) climbing throughout most of the day only to go flat late in trading. A new report from the National Association of Realtors released this morning said home sales fell 5.1% in January to a seasonally adjusted rate of 4.62 million, the slowest pace since July 2012. Weather may have played a role, but these figures are another sign that the housing recovery has slowed down in recent months.  

The big loser on the market today is Groupon (NASDAQ:GRPN), which is down nearly 22% after reporting a solid 20% increase in quarterly revenue to $768.4 million but an $81.2 million net loss thanks to acquisitions and a nonoperating loss on an investment in China.

The online deal specialist's struggles since going public are a reminder of what a risky world tech IPOs can be. Groupon, Zynga (NASDAQ:ZNGA), LinkedIn (NYSE:LNKD), and Yelp (NYSE:YELP) went public in 2011 and 2012, but their fates have been very different since hitting the market.

GRPN Total Return Price Chart

GRPN Total Return Price data by YCharts.

Groupon and Zynga have been abysmal failures since then, while LinkedIn and Yelp have done extremely well. The reason is easier to identify than you might think. While Groupon and Zynga have struggled with massive losses, LinkedIn is making a profit and Yelp was nearly profitable over the past 12 months.

GRPN Net Income (TTM) Chart

GRPN Net Income (TTM) data by YCharts.

Even hot tech IPOs have to prove that they can make money, and the fundamentals of the business is what will drive stock performance.

Groupon is finding that out today, and unless it proves the ability to make money over the long term it will fade away like past hot tech IPOs. My money would be on LinkedIn and Yelp, which have built real business plans and are rewarding shareholders as a result.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends LinkedIn and Yelp. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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