Groupon Inc shares dropped on Wednesday after the top underwriter on the company's recent initial public offering started research coverage with a luke-warm report.
Analysts at Morgan Stanley came out with an equal-weight rating on the stock and cited fierce competition in the daily deal industry, which Groupon leads.
As if to hammer home that point, eBay Inc's PayPal unit unveiled plans on Wednesday to start offering coupons to its more than 100 million users via smartphones and other mobile devices.
The move stems from eBay's April acquisition of Where.com, a location-based mobile advertising and services company.
Groupon participates in a highly competitive business, Morgan Stanley analysts, led by Scott Devitt, wrote in the Investment Risks section of their initiation note on Groupon. Competitors may not be as motivated by near-term profitability, and subsidize deals or offer merchants more favorable terms.
Research analysts at IPO underwriters are typically upbeat when they start covering companies that have been important clients. Thus a neutral rating is noteworthy.
Groupon shares dropped 4.5 percent to $22.28 in afternoon trading on Wednesday. Groupon went public in November at $20. The shares slumped below the IPO price in late November but have rebounded recently.
Morgan Stanley analysts said Groupon has several advantages, including a huge salesforce, many merchant relationships, a massive subscriber base and valuable data that comes with that.
However, they also said a Groupon share price over $23, where it stood earlier this week, means investors should wait for a better entry point before buying the stock.
Goldman Sachs, the other lead underwriter on the Groupon IPO, started coverage on the company on Wednesday with a buy rating, saying Groupon has the key to unlocking the massive local advertising market on the Internet.
The size of the addressable market, new business models like Groupon Now! in mobile, and the advantages of scale more than offset the considerable risks from competition, margin pressure, and deal fatigue, Goldman Sachs analysts said in their note.
Several other brokerages initiated coverage of Groupon, more than a month after it raised $700 million in one of this year's most closely watched IPOs.
RBC Capital Markets started Groupon with a sector perform rating, saying it sees few companies that have the open-ended growth opportunity that Groupon has.
But Citigroup said the success in new segments -- Groupon Now, Groupon Rewards, Getaways, Live, Goods -- could take significant time to prove out, and it started the company with a neutral rating.
Citigroup said Groupon's current valuation is at a slight premium to its Internet peers such as Amazon.com Inc, Netflix Inc and LinkedIn Corp.
JPMorgan started Groupon with neutral and said it expects Groupon's revenue growth in 2012-13 to slow from current levels as the company slows new subscriber acquisition in the United States and its maturing international markets.
One of the key investor debates around Groupon has been whether the company can continue to grow revenue despite slowing subscriber growth and potential concerns around sustainability of subscriber conversion rates, JPMorgan analyst Doug Anmuth wrote in a note.
(Reporting by Alistair Barr in San Francisco and Ashutosh Pandey in Bangalore; Editing by Supriya Kurane and John Wallace)