Over the summer, in June, I posed the question What Does Groupon and The Matrix Have in Common? Groupon had an unsustainable business model that pushed phenonenal growth, but into rampant competition with practically no barriers to entry. I also broight up suspicous accounting irregularities, an issue that I haven't read about in the media for analyst reports. Long story short, any fundamental investor and many retail businesses who actually believe in the stated valuations and viability of Groupon and its extant business model have yet to be unplugged. Which color pill did you pick? Subscribers should reference Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36).
As subscribers should remember, I posed (quite early on) whether it was "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 Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):
In particular, I would like to point out this nugget from said report...
“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.“
Well, as it turned out it appears as if I had a very valid point. Three months later in September, I Suggested Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them. I felt the reason was obvious. As quoted from the NYT Deal Book column: 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!!!
Investors who were not BoomBustBlog subscribers at the time yet somehow found religion (click here to subscribe) and who were successfully pitched this IPO by their all so trustworthy bankers and brokers should feel free to download our update to the Groupon piece Groupon Revenue Restated, and don't forget to show a copy to those who are all so trustworthy. The valuation bands in both documents still hold quite true from our opinion. In the meantime, you can see how the GRPN stock has performed. Remember, bankers can easily create synthetic demand which will pop the stock giving a strong positive return up front by floating a very small number of shares and releasing it to a very hungry, expertly marketed to, yet highly unsuspecting (read as not BoomBustBlog reading) public. This has absolutely nothing to do with fundamentals, and this is a fundamental analysis site.
The results were quite predictable...
Nov 08, 2011 · Oct. 31 (Bloomberg) -- Groupon Inc.’s decision to push ahead with an initial public offering as other startups hold off may be driven more by …www.businessweek.com/news/2011-11-08/groupon-ipo-a-must-as-cash-needs-climb-with...
Nov 03, 2011 · Groupon is selling about $700 million worth of stock in its IPO, making the daily-deals company the biggest tech IPO of its kind since Google’s …blogs.wsj.com/deals/2011/11/03/groupon-is-the-biggest-internet-ipo-since-google
Nov 04, 2011 · Groupon Chief Executive Andrew Mason poses with his fiancee, pop musician Jenny Gillespie, outside the Nasdaq Market following his company's IPO …www.reuters.com/article/2011/11/04/us-groupon-finalpricing-idUSTRE7A27TG20111104
Nov 04, 2011 · Groupon's IPO is predictably hot, but that won't erase the red flags and caveats that come with its business model. FORTUNE -- Tech IPOs are …tech.fortune.cnn.com/2011/11/04/groupon-ipo-bubble
Nov 03, 2011 · Daily deals pioneer Groupon priced its initial public offering late Thursday at $20 per share. Groupon likely to price IPO after Thursday market
We have discussed in explicit detail, the valuations and realistic expectations of several "Internet" companies in the recent past. As a refresher:
- A Realistic Forensic Valuation of LinkedIn – There Ain’t No Surprises Here…
- 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
- Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!