How to play it: Groupon and high-profile IPOs
NEW YORK (Reuters) - The online coupon company Groupon raised $700 million after increasing the size of its offering, which priced at $20 per share, above an initial range. The company was valued at about $13 billion when the IPO priced -- about half of earlier estimates.
Groupon's IPO had been hotly anticipated by investors, partly because it is among the first public social networking companies. The demand may have been pumped up further by the small portion of the company being sold.
The percentage of the company being sold was just 5.5 percent, the second smallest since 2001 and well below the average of about 38 percent, according to capital markets data provider Ipreo.
Social networking is viewed as a sector that will dominate online activity in the future, and some, like yet-to-be launched Facebook, show huge money-making potential. But many are skeptical of Groupon's business model and its ability to generate long-term profit and revenue growth. Regulatory pressure has led it to change its accounting practices twice in the past year. At the same time, the company also lost two operating chiefs.
Here are a few ways to play the IPO and social media:
DON'T GET YOUR GROUPON YET
Groupon's IPO came with a tiny float representing just over 5 percent of the company. That helped drive up demand, leading to an opening day "pop" that may not last, analysts said.
Groupon debuted on Nasdaq on Friday, with its stock rising as much as 56 percent and with the company approaching $20 billion in market capitalization.
On Monday, the stock rose 1.8 percent to $26.61 in early trading.
Scott Rostan, adjunct professor at Kenan-Flagler School of Business at UNC-Chapel Hill, said that investors historically only see gains if they bought at the IPO level, a strategy that is out of reach for most investors because of limited supply and a high barrier to entry.
Given the small float and heavy demand for the stock, retail investors may need to wait as long as a few weeks before they are even able to buy in. During that time, the stock is unlikely to recapture its early highs.
Rostan pointed to LinkedIn Corp, a professional social networking company that went public in on May 19, as a potential model for Groupon. In its first day of trading, the stock surged more than 109 percent, and climbed as high as 171 percent during the session. LinkedIn hasn't closed above $94.25, its closing price the first trading day, since August 4.
"If you bought at LinkedIn's IPO price (of $45) then you've seen some gains, but if you bought at the end of the first day then you're down," he said.
Joshua Brown, vice president of investments at Fusion Analytics in New York, said investors interested in a high-profile IPO like Groupon, should buy no more than a third of the stake they ultimately want to hold immediately after the shares go public. After 60 to 90 days, analysts will weigh in with their ratings.
"If they come in with 'neutral' ratings, that could be a kiss of death," he said. But if analysts say "buy," then investors can decide whether to take a bigger position, he said.
About six months later, when the lock-up period expires and insiders can sell their positions, consider another purchase. "You want to see if there are enough buyers to support the stock, especially with Groupon going public with less than 5 percent," he said.
SHORT THE SHARES--IF YOU CAN
Given the surge in Groupon's trading debut and the looming questions about the company's prospects, many investors might want to short the stock to cash in on any price decline.
A near-term sell-off could be likely, given the sharp initial rise. But it might not be as easy as it sounds to short Groupon given the small float, which limits the shares available to borrow for the play.
"This can force up the cost and present supply issues," said Alex Brog, a spokesman for Data Explorers wrote in an e-mail. "Initial demand to borrow post-IPO can be inflated by brokers looking to hold stock for liquidity purposes, although in cases like LinkedIn, there was strong demand to short."
Options will begin trading in one week, and are expected be listed on both the International Securities Exchange and Deutsche Boerse AG on November 14.
MAKE AN INDIRECT PLAY
Given its size and the buzz around social networking, Groupon is one of the most talked-about IPOs of the year. That interest opens up alternative ways to play the debut.
Kathy Smith, principal at the Greenwich, Connecticut-based Renaissance Capital, said a fund tied to IPOs is one way to invest in the space. Among them: First Trust U.S. IPO index, an index of the top 100 IPOs, ranked quarterly by market cap in the IPOX Global Composite Index. The stocks are purchased a week after the IPO and held for four years.
The fund is up 2.7 percent year-to-date, beating the broader S&P 500, which is down 0.4 percent for the year. The First Trust Index's top 10 holdings currently include Visa Inc, Philip Morris International Inc and General Motors Co.
Another option: Buy companies that own social media. Fusion's Brown cited GSV Capital Corp, which holds shares in such privately-held names as Facebook. The company also owns part of Groupon. Its shares rose in anticipation of the Groupon debut and are up 8 percent this quarter.
"That's an alternative way, but... if we're going to be in tech, we prefer companies that will win no matter which social networking site wins," Brown said.
One of his favorites, which benefits from Web growth in general: Cloud computing firm Rackspace Hosting Inc, a name "that will benefit from more things happening on the web, no matter where on the web they happen."
(Reporting by Ryan Vlastelica in New York; Editing by Jennifer Merritt and Walden Siew)
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