Groupon went public today and started trading at $30 a share this morning. The company originally priced its stock at $20 last night.
It seems like it’s making a great return, but you might not want to jump in just yet.
Investing when a company first goes public can be a smart idea. Going for the IPO, or initial public offer, gives you the opportunity to buy a stock for cheap before the company takes off and its value skyrockets.
Many times companies go public without anyone giving it much notice, and this is a real opportunity if you happen to find a business with potential that no one else sees yet. But when businesses get popular when they’re still private, much like Groupon, investors jump on the chance to get on the ground floor, which artificially drives up the stock’s value.
You’re also taking a bigger risk when you pounce that early because there’s less financial information available about the company. We won’t know, for example, how Groupon slashing its marketing budget will affect it in the long run or whether the company will be able to acquire subscribers in the future.
Granted, the site might take its company to a new level with all the money its gaining from the stock market, but it’s a huge risk for investors.
So what about Groupon, specifically?
Market experts, like our editor-in-chief Henry Blodget, think buying into Groupon right now is a really dumb idea because it’s going to be a rough ride for the next couple quarters … and possibly longer.
One of the main reasons for the scepticism is the exceedingly high amount the company spends on marketing. It costs Groupon at least $5.07 to acquire one new subscriber, and in the last nine months, it made an average of $11.07 per customer, according to spreadsheets it made public in order to sell stock.
That’s still a profit, but the average monthly revenue has been dramatically falling. It dropped 15 per cent just in the month of September.
To make up for the public scare, Groupon massively cut back its costs in the last quarter to show that it can still make a profit even without a big marketing budget. It succeeded in its goal, although the amount of new subscribers is still falling, and the move looks like it might be a fake-out, said CNBC’s John Carney.
A month or two after cutting the marketing back, Groupon still benefits from the money it spent on trying to acquire new users. Therefore, it’s still unclear whether the site can keep up its profits without throwing down so much on advertising.
Groupon could be a total stock fail or it could be more like Amazon, which did alright when it first went public and then really dipped. But now, of course, Amazon is a total tech success. Groupon could be the same, suggests Carney, where it’ll have to invest a lot of money before seeing real profit growth in the long run.
But because of the lack of financial information, it’s still hard to tell.