Internet Stocks: Groupon Caught Cheating!

| April 2, 2012 | 0 Comments

Investors who got an early start on their weekend plans missed some big news on Friday afternoon.  Internet sensation Groupon (GRPN) announced after the close they’re restating financial results for the fourth quarter and full year 2011.

We’ll get to the dirty details in just a moment.  But first a quick recap of the company.

Groupon went public last November in the biggest IPO for an internet company since Google in 2004.  The upstart internet coupon provider raised $700 million in one of the hottest IPO’s in recent memory.

And make no mistake, Groupon’s IPO was red hot…

On its first day of trading, GRPN briefly shot up to over $31 per share. That valued the company at more than $16 billion… about the same as companies like Allstate (ALL), Waste Management (WM), and Ralph Lauren (RL).

Investors were starry-eyed over the company’s seemingly unlimited upside potential.  They were mesmerized by Groupon’s ability to market to over 150 million consumers on a daily basis.  Very few companies, if any, have that kind of reach.

But there were signs of trouble at Groupon before they ever issued a single share of stock.

In the days leading up to the IPO, the SEC took Groupon to task for overly aggressive accounting.  The regulatory agency forced Groupon to restate the financials reported in their S-1 registration statement.

The SEC objected to the way the company defined revenue.  And for good reason.  Groupon was artificially inflating their revenue numbers by reporting the gross figures.

In other words, they weren’t subtracting out the amounts owed to merchants from the coupons they were selling.  (Groupon and their merchant customers typically share coupon proceeds on a 50-50 basis.)

It also bears mentioning, Groupon reported these figures under the watchful eye of their current auditors, Ernst & Young.

Unfortunately, it looks like Groupon’s management team failed to learn from this embarrassing moment.  Once again, they’ve been caught trying to pump up their sales in violation of generally accepted accounting principles.

At least this time, their auditor isn’t waiting for a nudge from the SEC to blow the whistle.

According to Ernst & Young, Groupon failed to set aside sufficient funds to cover potential refunds to customers.  The accounting firm called the mistake a result of “material weakness in [Groupon’s] internal controls.”

As if that’s not bad enough, the restatement will result in a bigger loss for the quarter.

In February, Groupon said it had posted a net loss of $42.7 million, or 8 cents per share, on revenue of $506.5 million for the fourth quarter.  After the restatement, the net loss increases to $65.4 million (12 cents per share) and revenue drops to $492.2 million.

As you might imagine, the shares took a beating in after-hours trading on Friday.  Investors quickly sent the shares down more than 10% on the surprising news.

And that’s just for starters…

The selling has picked up on Monday where it left off on Friday.  In early morning trade, Groupon shares are plunging by more than 12%.

Are investors being too hard on the newly public company?

I don’t think so.

When it comes to “accounting irregularities”, you can never be too careful.  Remember Enron and WorldCom?  Investors who held on to those stocks after early reports of financial shenanigans later lost everything.

And Groupon has already had several run-ins with the SEC and its own auditors over the company’s fiercely aggressive approach to financial reporting.

The first time it happens you may write it off as growing pains for a new management team.  But several problems in just the first six months of going public?

That sounds to me like a lot more than just growing pains!

After seeing so many investors get burned by companies with fishy accounting in the past, I’m steering clear of Groupon.  There are plenty of companies out there with management who conduct business on the up and up.

I suggest you look for more trustworthy places to invest your hard earned money as well.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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