by Michael Tarsala
You didn’t need an accounting degree to see this Groupon restatement mess coming.
Multiple people outside the company had raised detailed concerns about its books ahead of its November IPO. But at that time, there was no stopping the surge of market orders on its first day of trading.
Fast forward to April. Groupon has been been roughly cut in half from its opening high. It is now facing the extra scrutiny investors probably should have given the company in the first place. And the SEC may now be getting involved.
There’s a group out there saying “I told you so”. And truly, they did.
Groupon is now a case study in why every investor needs to apply due diligence and skepticism when it comes to trendy stocks.
In my mind, there are three main Groupon takeaways for every investor:
Read the details
This part is not that hard or time consuming: For your biggest individual investments, you should be visiting the SEC Edgar site, and reading the latest filings. In Groupon’s case, that’s where some of the first red flags surfaced.
Right in its IPO filing, Groupon acknowledged its management team has “limited experience” with regulatory compliance — a problem that seemed to persist for months. And the filings would have tipped you off to a prior revenue correction.
Also, blogs such as the daily linkfest at Abnormal Returns and Josh Brown’s The Reformed Broker are now required reading.
Brown, in particular, has been a consistent Groupon critic.
Blogs helped to popularize questions from professors Ed Ketz and Tony Catanach about Groupon’s accounting and internal controls.
Those same professors were among the first to wonder out loud if Groupon was “cooking its books.”
If you don’t understand it, avoid it
Warren Buffett is famous for this advice. And who am I to argue?
In Groupon’s case, we’re talking about a company that invented its own financial metric: Adjusted Consolidated Segment Operating Income. How’s that for simplicity?
I can appreciate operating earnings (EBITDA, as an example) as a way to better understand earnings trends. Yet I had never heard of adjusted CSOI until Groupon came along, which was set up to exclude its marketing expenses. Keep in mind, marketing is essentially Groupon’s business! Eric Savitz at Forbes brought the to controversial metric to the fore 10 months ago.
And writers including Rocky Agrawal illuminated the Groupon business model in a post that said the company acts as a “subprime lender” to small businesses.
Expect perfection when the stock is priced that way
Groupon reached a market cap of nearly $20 billion on its first day, trading at about 9 times sales. As Henry Blodget points out, the typical online media company trades at just 3 to 8 times sales.
No doubt, you can expect to pay more for a company with better-than-average growth prospects.
But for a higher-than-average price, you also should be getting a higher-than-average trust factor.
And after its restatement, that is where Groupon now appears to be struggling.
