What's The Best Way To Profit From Groupon's IPO?

Reggie Middleton's picture

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 icon Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

Groupon_Valuation_Page_03

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.“

image037

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 File Icon 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...

GRPN

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!