After spiking 30% on Groupon‘s (NASDAQ:GRPN) IPO debut in early November, GRPN shares had been fairly quiet, with the stock remaining in a tight range of $24 to $25.
Things changed for the worse this week. The stock had broken through its $20 IPO price and was trading under $18 as of midday Wednesday, meaning some painful losses for investors who jumped into the stock right after the opening.
No doubt, the horrible performance of the equities markets in general has been a key factor. Still, there are lingering doubts about Groupon’s business model itself, the flaws of which the media keeps bringing to light. Consider a recent story from NBC: A London baker nearly went bust because a Groupon offer resulted in the business having to make 102,000 cupcakes — at a 75% discount! The store lost nearly $20,000 on the “deal.”
Investors are concerned that Groupon could see a slowdown in its business. In addition to bad PR from stories like the London bakery, Groupon has had to aggressively cut back on marketing expenditures in an effort to reach profitability. Such cutbacks won’t help at a time when Groupon’s competition is persisting. For example, LivingSocial announced a variety of highly discounted deals from some big names — such as with Verizon (NYSE:VZ), OfficeMax (NYSE:OMX) and Electronic Arts (NASDAQ:ERTS) — for Black Friday and Cyber Monday. It also looks like the company is about to raise a new round of financing for $200 million.
For IPO investors, it’s always dicey when a stock falls below the offering price. It shows a serious lack of support. Potential investors should be wary, as there is likely to be more downside risk on GRPN stock.
Tom Taulli runs the InvestorPlace blog “IPO Playbook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.