Groupon: Are There any Coupon Deals Also for Investors?

By Jay Wei - May 9, 2012 | Tickers: AMZN, GRPN | 0 Comments

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Companies and their underwriters tend to price their stocks for IPOs in a way that mostly benefits company founders and original investors. In other words, a stock may be overvalued and thus its price can become unsustainable in post-IPO trading. All these can come at the expense of public investors. A fresh example of IPO over-valuation from the most recent memory would be the stock issuance by Groupon (NASDAQ: GRPN), an online company providing daily coupon deals. The loss of its stock value in post-IPO trading has even prompted a class-action lawsuit by investors against the company and its underwriters.

Groupon’s IPO valued the company at $11 billion, essentially stapling a tag of large-cap market capitalization onto a company that was still relatively a start-up. If total market cap alone didn’t fully reveal the extent of the IPO over-valuation, the comparison of the underwriter-set price and the company’s per-share equity book value at the time certainly did. At $20, Groupon offered its initial stock sale at more than 23 times its book value, which was only 85 cents per share at the time after new shareholders’ contributions. This was no doubt an overstretch in valuation, and the market agreed later on. Groupon stock never formed an uptrend beyond its IPO price and is now largely below its IPO price of $20. Trading around $10 currently, the stock is still more than 9 times its book value.

What has been also hurting Groupon stock is the company’s repeated accounting misstatements and ongoing concerns by investors about the viability of its current business model. We investors rely on company financial statements to help make our investment decisions and thus any misrepresentations of company financials affect the quality of our stock valuation. Even before its IPO, Groupon was reporting revenue incorrectly by accounting for the full amount of proceeds it received on behalf of merchants. In fact, Groupon retained only a small cut of the total proceeds as its true revenue. Investors, however, had been led to believe that the company was generating impressive revenues. That problem was corrected at the request of the SEC upon its IPO registration, but the adjustment was not fully made into the underwiters' IPO valuation.

The most recent accounting mistreatment relates to Groupon's understated refund reserve accrual, a liability used to cover potential reimbursement of certain coupon offers. This in turn understates operating expense that should have been accrued in the period when the company incurred it. As a result, profit was overstated. Accounting restatements were made later on, prompting a large decline in its stock price.

Investors are also increasingly questioning the company’s untested business model under which, Groupon essentially operates as a coupon distributor for other merchants. If merchants can afford to offer discounts at an attractive level and consistent basis, Groupon will make its profit off merchants' price cuts. One inherent problem with this business model is that Groupon relies heavily on the willingness of merchants to cut deep into their profit margins so that it can retain a share of the discounts. Over time, Groupon’s profitability can become unstable when some merchants offer discounts only as promotions for specific periods of time. 

In order to have a more stable source of growth, Groupon may want to consider shifting from being a sole coupon distributor to include the role as a value-added marketer. Not to become another Amazon (NASDAQ: AMZN) to get involved in actually selling stuff, Groupon can certainly leverage its reputation as an online destination for value-conscious consumers to help market other merchants’ products or services without always resorting to the use of coupons and discounts. This part of business seems naturally in line with Groupon’s original goal of helping promote other merchants’ businesses.

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