Wall Street Cools to Groupon

Wall Street research analysts, who usually write rosy reports on companies their firms take public, gave surprisingly faint praise to the latest big Internet stock to hit the market, discount deal site Groupon Inc.

Analysts at a majority of Groupon's underwriters which initiated coverage for the first time Wednesday issued the equivalent of "hold" or neutral recommendations, with "holds" outnumbering "buys" by a margin of six to five. In fact, two of the three top-line managers of Groupon's initial public offering—Morgan Stanley and Credit Suisse Group—were neutral, while the report from Goldman Sachs Group Inc. was positive.

Analysts are barred from issuing reports for 40 calendar days after the IPO to comply with anti-hyping rules.
Ordinarily, such research by analysts at the underwriters is predominantly bullish—so much that the stocks often rise just before the reports are due to come out. Stock of LinkedIn Corp. rose 20% before a set of uniformly bullish reports by analysts at its lead underwriters, and another 12% on June 28 when the reports were published.

Indeed, the stock of Groupon, whose IPO was priced at $20 a share on Nov. 3, has been rising steadily for the past two-and-a-half weeks, from a post-IPO low of $15.24 to a closing price on Tuesday of $23.32. But when the reports came out on Wednesday, the stock fell by more than $2 in the first hour of trading before recovering to finish down 77 cents, or 3.3%, to $22.55 on Nasdaq.

The analysts' mixed reviews reflect the ongoing questions surrounding Groupon. While the company is growing like a weed—revenue for the first nine months this year rose more than seven times to $1.12 billion—it's still unprofitable and the barriers to enter the market remain relatively low.
A Groupon spokeswoman declined to comment.

Credit Suisse analysts Spencer Wang and Dean Prissman initiated coverage with a "neutral" rating at a $25 price target, saying "valuation tempers our near-term enthusiasm as our $25 target price suggests modest upside at current levels." They added that "managing a young company with a global footprint in 45 different [countries] could prove challenging."

Morgan Stanley analyst Scott Devitt advised clients to "equal-weight" the stock with a price target of $27, saying "we would wait for a better entry point to build a position." While he said Groupon's size could help it weather competition, he cautioned that only time will tell whether Groupon is "a successful company, or just an Internet induced fad."

Goldman analyst Heath Terry set a higher $29 price target in initiating coverage with a "buy," saying that the size of the $100 billion local advertising market and Groupon's new mobile business models "and the advantages of scale more than offset the considerable risks from competition, margin pressure and deal fatigue."

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