To begin with, an IPO has a life of its own during its opening day of trading. Its aftermarket price action is not affected by current stock market conditions.
This is the only time all the IPO players come together – the investors, the flippers and the day traders. The investors adjust their portfolios, the flippers are usually out on the opening trade and the click-dot-traders thrive on high volume and volatility.
Their collective wheeling and dealing result in heavy opening-day volume and the IPO’s price can be volatile.
In the following days, you can see the “hot money” flowing out of the IPO. It moves on to other trading opportunities, the flippers are long gone, and all that’s left are investors.
Back to the Beginning
Let’s take a look at Groupon’s first trading day and beyond.
On the evening of Nov. 3, Groupon priced 35 million shares at $20 each.
On Nov. 4, Groupon’s IPO traded as high as $31.14, as low as $25.90, and closed at $26.11 on a volume of 49.8 million shares. That’s a turnover ratio of 142.3 percent.
On Nov. 5, Groupon’s IPO traded as high as $27.78, as low as $24.59, and closed at $25.97 on a volume of 9.5 million shares.
Day No. 3
On Nov. 6, Groupon’s IPO traded as high as $26.21, as low as $24.76, and closed at $24.90 on a volume of 4.3 million shares.
A Week After Opening Day
On Nov. 11, Groupon’s IPO traded as high as $25, as low as $23.41, and closed at $24.25 on a volume of 1.3 million shares.
By then, the Groupon IPO had moved into the next stage of its life cycle. It is the twilight zone of the “quiet period” and, by law, the underwriters can not give out any investment guidance.
The “quiet period” prohibits those involved in the underwriting and distribution of an IPO from promoting the stock for a period of 28 days. For the company and its managing underwriters, the “quiet period” is extended to 40 days. The latter was an outgrowth of the 1999/2000 insanity-dot-com IPO days.
As a result, the IPO’s unseasoned securities fall under the influence of the stock market and its investors must wait until its underwriters can initiate research coverage.
Exception to the Rule
However – and there’s always a however – any investment advisory firm, research firm or broker/dealer not involved in the underwriting process is free to comment on any IPO at any time.
In Groupon’s case, as of Friday, Nov. 25, five brokers had initiated research coverage, according to Thomson First Call. None were involved with its underwriting.
Two rated the stock as a “buy,” two as a “hold” and one as a “sell.” Their price targets ranged from $35 to $15 with a mean target of $26 per share.
Groupon closed on Friday, Nov. 25, at $16.75 per share.
Some Numbers Worth Noting
Now here’s where it gets informative – the Thomson First Call financial estimates for Groupon, compared with the company’s actual results for 2010:
Actual Revenues for Year Ended Dec. 31, 2010: $312 million
Estimated Revenues for Year Ended 2011: $1.6 billion
Estimated Revenues for Year Ended 2012: $2.38 billion
Estimated Revenues for Year Ended 2013: $2.85 billion
Actual Net Loss for Year Ended Dec. 31, 2010: $389 million – or a loss of $1.33 per share
Estimated Net Loss for Year Ended 2011: $321.9 million or a loss of 64 cents per share on more shares outstanding
**Estimated Net Income for Year Ended 2012: $154.7 million or 14 cents per share
**Estimated Net Income for Year Ended 2013: $480.6 million or 41 cents per share
**Note the projected switch from an annual net loss to profitability, beginning with the year ended 2012.
Bookmark Dec. 14, 2011. That is the day when the Groupon IPO exits from its 28-day “quiet period” and then add another 12 days for date when the company and its managing underwriters are free to talk.
What’s more, IPOs have been known to run up ahead of the expirations of their quiet periods on anticipation of favorable research initiations by their underwriters.
That pretty much finishes the life cycle of an IPO.
Disclosure: Neither the author nor anyone else on the IPOScoop.com staff has a position in any stocks mentioned, nor do they trade or invest in IPOs. The author and IPOScoop.com staff do not issue advice, recommendations or opinions.