8:17 p.m. | Updated
Groupon’s bankers reaped more than $40 million in fees in November, when the daily deals giant went public at $20 a share. Now, Wall Street’s affections have cooled.
Six of the company’s underwriters, which had to wait until Wednesday to initiate coverage, stamped Groupon’s stock with neutral or hold ratings. Five issued bullish, or buy, calls. Their price targets ranged from $21 to $29. The lukewarm reception dragged on Groupon’s shares, as the stock tumbled 3.3 percent to close Wednesday at $22.55.
It is an ominous sign for the many Internet companies waiting to go public, like Zynga, the online game maker that is expected to begin trading on Friday. Despite continuing enthusiasm for new technology offerings, investors have proceeded cautiously amid turmoil in the equity markets and persistent skepticism about the fundamentals of new business models.
Groupon, which offered less than 10 percent of its stock, has fluctuated wildly in recent weeks, falling as low as $14 a share. Jive Software, an enterprise social network service, rose 25 percent on its first day of trading this week but was virtually flat on Wednesday. Nexon fared worse; the company, a rival of Zynga based in Tokyo, slipped 2 percent on its Wednesday debut, despite robust profits and a base of about 77 million monthly users.
On Wednesday, Groupon’s analysts echoed the longstanding concerns about the three-year-old service, including competitive pressures, the unproved business model and limited upside opportunity. Two underwriters, Citigroup and Deutsche Bank Securities, even led with the same pun — “waiting for a better deal.”
Critics, in part, are skeptical that Groupon can sustain its aggressive growth trajectory. The company recorded revenue of $1.1 billion for the first nine months of the year, but also splurged on online advertising, spending about $613 million on marketing in that period.
Two of its lead underwriters, Morgan Stanley and Credit Suisse, expressed optimism for Groupon’s outlook but still issued neutral ratings. Morgan Stanley initiated coverage at equal weight, with a $27 price target. It praised Groupon for its “prime mover status and scale,” but warned investors to “wait for a better entry point to build a position.” The firm also pointed out that Groupon’s competitive advantage might be eroded as merchants became more sophisticated on the Web and rivals attacked its market share.
“Groupon’s competitive advantage of sales-driven leads, deal execution strategy and high-quality customer service is not rocket science,” Morgan Stanley said, “but has proven difficult to replicate at scale.”
Credit Suisse, which was even more cautious, with a $25 target, also noted risk factors, including low barriers to entry and a new business model where “58 percent of the voting shares are controlled by insiders.” Deutsche Bank, the most bearish of Groupon’s underwriters, predicted a slight pullback in its report, to $21 a share.
“Our near-term neutral stance on Groupon shares rests largely in the nascency of the business model in the service/product shift, along with a transition from aggressive growth via marketing to improved profitability,” the bank said.
Although a so-called Chinese Wall separates the banks’ underwriting businesses from their equity research arms, investors typically expect favorable analyst reports from a company’s underwriters — at least for the first round. In June, LinkedIn’s bankers unleashed a wave of positive reports. Morgan Stanley, its lead underwriter, put an overweight rating on stock and gave an $88 price target, calling it a rising “standard utility” for recruiters. LinkedIn fell 2 percent on Wednesday, closing at $65.95.
Still, there were some kind words for Groupon. Five underwriters, including the co-lead, Goldman Sachs, issued buy or outperform ratings.
Goldman, one of the most optimistic, initiated coverage at $29 and praised the company as “the key to unlocking the massive local advertising market with which the Internet has long struggled.”
Article source: http://feeds.nytimes.com/click.phdo?i=1a55a44eaa033d3eb626f53905017310
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