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Groupon: Bye-bye early investors, hello new ones

Groupon is expected to report its fiscal second-quarter Monday. Groupon is coming off a better-than-expected first fiscal quarter, but its otherwise disappointing performance since going public in November has sent its stock price tumbling.

Charles Rex Arbogast/AP

At least Facebook Inc. has company in its misery: Groupon Inc. shares have slid even more sharply since its initial public offering, and the daily-deals company has been now treated to a lengthy article in the Wall Street Journal about how early investors are giving up on the stock.

Groupon's share price has shrivelled to less than a quarter of its IPO price of $20 (U.S.) – and rather than attracting a new group of value-hungry investors, the focus remains on the early ones whose interest in the stock has been declining with the price.

The Wall Street Journal reported that Marc Andreessen, famous for his exploits during the dot-com bubble in the late 1990s when he sold Netscape Communications Corp., has sold all of his 5.1 million Groupon shares through his firm Andreessen Horowitz after restrictions on holding the shares ended at the start of June.

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Even with the share price decline, the Journal estimates Andreessen Horowitz pocketed a profit of $14-million on the initial investment, made when Groupon was not yet a publicly traded company.

Such high-profile reversals can suggest that the so-called smart money – in this case, insiders with a lot of industry know-how – are running for the exits on social media stocks in general, a group that also includes names like Facebook and Zynga Inc. It also draws inevitable comparisons to the dot-com era, when formerly hot stocks tanked and dragged down the Nasdaq index from heights it has not come close to regaining more than 10 years later.

But you do have to wonder if the downside here isn't quite as extreme as it was during the dot-com bust – partly because companies like Groupon and Facebook are struggling through a reappraisal of growth rather than viability.

In the second quarter, Groupon's revenues rose 45 per cent over last year, to more than $569-million. Its billings – the money it brings in through its daily coupon offers but has not yet distributed to participating merchants – rose 38 per cent over last year, but fell 5 per cent from the previous quarter.

Numbers like these wouldn't be a problem for many companies, but the issue with social media companies is that their valuations were set at very high levels during their IPOs. That has made disappointment particularly painful.

Now, these valuations are coming down. In the case of Groupn, the shares trade at about 28-times estimated earnings. For Facebook, its price-to-earnings ratio has retreated to about 40 from an IPO level of 100.

Sure, early investors might be leaving as their grand visions of massive growth encounter a reality that is far less certain. But that doesn't necessarily mean there is no value in these stocks.

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Admittedly, it is hard to imagine Warren Buffett getting interested. But it is just as hard to imagine Groupon or Facebook becoming this era's Pets.com.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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