Last month I opined on The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. As its shares marched back up towards its ridiculous IPO price that I warned the entire year previous was basically a marketing/hype scam engineered to confiscate one's hard earned capital, sell side analysts and mainstream media types ignored basic yet blatant cracks in this media darlings armor yet again. For one, we know this high growth company is already experiencing negative growth in active users...

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We also know that Google has essentially caught up to Facebook as a social media platform, reference I Don't Think Facebook Investors Will "Like" This!!! Google Has Already Caught Up In Terms Of Active Users. Despite these pertinent (and quite negative) facts, FB shares have been on the rise, although recently have last some of their froth. Why did the shares pop? Irrational exuberance! The sell side marketing analysis has it that Facebook is perfecting the marketing and mobile business model, and as a result is able to monetize its massive, yet shrinking user base. 

The counter to this argument is basically that it's not true. For one, the shrinking user base is real. The school age youth, once a mainstay of Facebook, is moving on. Simply ask the one's that you know. More importantly, it's ad model is basically a Sham! Any sell side analyst who attempted to value this company based on ad revenues without actually trying out its ad system is not worth postage used to send his bonus check. I tried the ad system out. While the click through rates were actually about 2/3rds that of Google's comparable ad model, the actual sales from the ads were less than abysmal - and this is for a rather interesting product. Even worse, the delivery of the ads proved to be highly intrusive, causing a significant and material amount of negative feedback from the Facebook community. Here are some examples of the feedback received from the so-called Facebook 'ads" that I paid for...

  • "Hey, I don't like this post. Please remove it."
  • "Please remove me from your list"
  • "I am getting unsubscribed advertisements and friend request that say I approved them"

There's actually a lot more than that, this just what was sitting in my inbox before it was deleted. Here's a screenshot of a conversation I had with on of the recipients of the so-called Facebook ads which are essentially paid for placements on somebody's wall...

Facebook ad failure

"I am getting... friend request that say I approved them"??? Does that sound like a sustainable business model to you? This is simply Grouponzi 2.0, just on a much larger scale!

The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

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This post is an example of what a little investigative reporting should look like. Let's attempt to recast pop media in the form of a smart ass blog. First, a glimpese of what's in the news today, as the NYT Deal Book column reports: Accounting Change Cuts Groupon’s Revenue

Groupon disclosed a major accounting change on Friday, essentially halving its once-jaw-dropping revenue after it encountered resistance from regulators with its filing to go public.

Groupon, the online coupon titan, announced separately that its chief operating officer of about five months, Margo Georgiadis, had stepped down.

The changes in the revised filing and the executive departure are likely to spur additional questions about Groupon, a much-envied rising star in the constellation of new Internet companies. The company has grown rapidly, but its ability to sustain that growth, the ways it measures growth and the eccentric public persona of its chief executive have come under fire at times.

Despite those criticisms, and the current turmoil in the stock market, Groupon is still aiming to go public next month, people briefed on the matter have said. That offering could value Groupon at more than $15 billion.

The company’s revised filing for an initial public offering also incorporated portions of a memorandum sent to employees by the company’s chief executive, Andrew Mason, that were subsequently leaked to the press. Analysts had questioned whether that letter ran afoul of a mandatory “quiet period” for companies seeking to go public.

The revenue accounting change is Groupon’s second since it filed to go public in May. Early last month, it removed references to an accounting metric that critics said misleadingly showed the company turning a profit.

In its latest filing, Groupon says that it has restated its financial results for the last three years “to correct for an error” in the way it reported revenue. Before, the company reported as revenue all the money it collected from customers, including cash that was later paid out to Groupon’s merchant partners.

Now, Groupon is reporting what it calls “net revenues,” which exclude the retailer payouts.

For example, in a version of the prospectus filed last month, Groupon reported $1.52 billion in revenue for the first six months of the year. In Friday’s filing, that number is now called net revenue and is $688 million. The original $1.52 billion figure is now counted as gross billings.

Groupon’s accounting change is the inverse of what Google did before its own public debut in 2004. The search giant initially excluded cash that was shared with distribution partners in its revenue figures. It later changed its revenue to include those payouts.

Groupon: Accounting Shenanigans That Can Make A Leprechaun Blush! - OR - I Told You Not To Trust These Guys!!!

Social networking stocks are the current obsession for Wall Street bankers. Groupon, LinkedIn and Facebook - a trio of Internet darlings, are absorbing market value and could even eclipse the market value of internet gaint Google. There are also host of other internet startups including Pandora (a music streaming service), HomeAway (online vacation-rentals company) Zynga and PopCap (social gaming sites) that are planning to test their fortunes at Wall Street. After LinkedIn which debuted as one the most expensive IPO (yet one of the most successful) in the American history based on the ratio of its market value to its yearly sales, Groupon has filed its IPO filings to test the market appetite for internet start-ups.c

In our June blog post and forensic analysis of Groupon “What Does Groupon and the Matrix Have In Common?we contend that the company’s revenues were not an appropriate measure to compare with its peers for valuation purpose as the company was overstating its revenues in its books of accounts as the revenue from Groupon were on gross basis while the appropriate comparable measure was gross profit which was the amount the company retained after paying its subscribers. Our contention was valuing the company on price-to-sales and looking at the “hyper” sales growth would make valuation look overly optimistic; besides other investment theses that were highlighted – falling revenue per subscribers, slowing growth rate, the flawed business model and competitive pressures, investors disconnect between value and risk, and of course the valuation.

Abstract from our June subscriber-only analysis - Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

“Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have reported revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.“

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In the latest S-1 registration statement, the company has revised its revenue figures by more than half. The company has restated its 2010 revenues from $713m to $313m while Q1-11 revenues were restated to $296m from $645m previously. The company has restated its financial results “to correct for an error” in the way it reported revenue. The revenue accounting change is Groupon’s second since it filed to go public. The company has also changed the presentation of certain expenses to be consistent with reporting revenue. Clearly, such errors and frequent change in the accounting policies clearly puts strain on the credibility of management – and that’s putting it lighlty, especially for a company that is contemplating an IPO, not to mention that such changes are top line numbers such as revenues. In another blow to Groupon, the company’s COO Margo Georgiadis is leaving the firm to join back Google.

BoomBustBlog subscribers (click here to subscribe) who are being pitched this IPO by their all so trustworthy bankers and brokers should feel free to download our update to the Groupon piece File Icon Groupon Revenue Restated, and don't forget to show a copy to those who are all so trustworthy. Speaking of the "Oh so trustworthy", my next post will DROP THE BOMB  on said industry as the guy with a pretty good track record in calling bank failure updates the post The Next Step in the Bank Implosion Cycle! Oh, those Name Brand Banks are going to get bashed as BoomBustBloggers get enriched!

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Note: Please join the dicssion below afer reading the article. I have included substantial analysis to get the conversation started.

Déjà vu: 1999 

Have you ever been in a dream where you thought for sure it was real?What would happen if you couldn't awake from that dream? How would you know if it was real, or not? It's 1999, the Matrix - one of the most creative movies of the century - is released and the stock market has seen companies trading at 3 and 4 digit PEs soar with no business models and even less prospects for the future.
It's 2011, Groupon, LinkedIn, Facebook, Banks, Brokers & REITs are all partying like its 1999! Subscribers, feel free to download icon Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36)

Social networking stocks are the current obsession for Wall Street bankers. Groupon, LinkedIn and Facebook - a trio of Internet darlings are dabbling the public markets and could even eclipse the market value of internet gaint Google. We have discussed in explicit detail, the valuations and realistic expectations of these companies in the recent past. As a refresher:

 

  1. A Realistic Forensic Valuation of LinkedIn – There Ain’t No Surprises Here…
  2. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  3. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!

 

  • There are also host of other internet startups including Pandora (a music streaming service), HomeAway (online vacation-rentals company) Zynga and PopCap (social gaming sites) that are planning to test their fortunes at Wall Street. After LinkedIn which debuted as one the most expensive IPO (yet one of the most successful) in the American history based on the ratio of its market value to its yearly sales, Groupon has filed its IPO filings to test the market appetite for internet start-ups. If the same frenzied marketers who created the frenzy of buyers who greeted LinkedIn on the first day of trading meet together on Groupon’s listing day, its market value could soon touch $50bn (assuming $25bn IPO). LinkedIn which debuted as the most expensive of IPOs has a current price-to-sales ratio of 28x. Facebook, reportedly to generate $2bn of sales, is commanding a valuation of $70bn in private markets with price-to-sales of 35x. Remember, these are the private markets, with a significant liquidity discount to account for the lack of access to public markets! Groupon with $1.3bn of sales (trailing 12 months) and IPO of $25bn valuation would be 19 times sales and 38 times if it gets as lucky as LinkedIn. These ratios are unmatched in the entire S&P Composite 1500 index of small, midsize and large companies. Indeed, investment bankers (Goldman Sachs and their friends at Morgan Stanley and elsewhere) have to be duly credited in their successful creation of abject euphoria surrounding tech companies. There’s a definitive dearth of commentary in the world of financial pundits regarding traditional metrics such as PE, which is admittedly not applicable to high growth tech start-ups since they fuel rapid growth in the early stages with strong reinvestment of earnings resulting in a dearth of earnings to show off. The caveat is that many observers fail to charge the expenditure of said cash flows with actual value creation. Is value actually being created with the reinvestment of earnings and cash flows or are would be earnings simply being used to purchase additional revenues?

The academic risk-reward trade off, among other things means, has traditionally meant that investors pay less for things that are unproven, ceteris paribus. At the moment, investors are paying premiums for unproven models. After LinkedIn, a similar yet dissimilar strategy is in place for Groupon, aiming for that perfect IPO. After all, you can’t fool someone with same strategy again, even if they may be captured investors that don’t subscribe to BoomBustBlog. If LinkedIn was all about pent up demand and social media with reliable earnings stream, then HYPER-growth is the new mantra at Groupon. Groupon has been credited as one of the fastest growing companies in history. No doubt, Groupon’s revenue grew at astronomical pace growing 2241% in 2010 and 1357% in Q1-2011. However, paying a premium for growth and premium for uncertain things are altogether different things. At the moment, investors are confusing a growth model with an unproven business model. Groupon, LinkedIn and Facebook (to an extent), although all in high growth stages, have yet to demonstrate a lasting and formidable business model and as yet should not command such premium valuation. Perhaps after giving all the discounts-of-the-day to its subscribers, the IPO is just a means to square up things at Groupon.

The Groupon Business Model

Is It Right To look To Groupon’s Sales As A Performance Metric?

Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have report revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.

As excerpted from page 3 of the BoomBustBlog subscription document icon Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

Groupon_Valuation_Page_03

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