Groupon: Just When You Thought It Couldn’t Get Any Worse
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Groupon (NASDAQ: GRPN) IPO in November – as expected – was met with over-the-top fanfare. As happens so often Groupon was and is one of those companies that individual investors in particular love – they use the service, like it and so invest in it – irrespective of fundamentals. Of course it’s easy to say now, but the woes the company is suffering through after the recent re-stating of financials shouldn’t have come as the shock it did.
Writing on the Wall
Before Groupon even went public there were indications the “…internal financial controls…” were not what they should be. The SEC – in conducting their due diligence prior to the IPO – made the company re-do their accounting practices on two different occasions. The first involved requiring Groupon to include the cost of marketing in stating operating income. How in the world management thought that wouldn’t or shouldn’t be included is almost unfathomable.
The second financial misstep prior to going public was equally disturbing. Until the SEC got involved Groupon didn’t deduct merchant payments from their revenue calculations. What? Either of these financial missteps are inexcusable, let alone both. And that brings us today.
And Now the Really Bad News
After Monday’s re-stating of financials that reduced revenue in Q4 by over $14 million and profits (or lack there of) by $22.6 million investors – quite naturally – ran for the hills. The company’s primary auditor – Ernst & Young – immediately distanced themselves from the errors stating “…the error is a material weakness in its internal controls.” Now this may sound like a firm that is simply covering their proverbial backsides, but not so.
In Groupon’s recently filed Form 10-K management ‘fessed up to the internal reporting problems – to their credit. But the material inaccuracies and attempts to doctor results remain a concern. And now thngs have gotten even worse.
Today’s announcement that shareholder right’s legal firm Johnson & Weaver LLP is filing a lawsuit claiming breach of fiduciary duty is a potentially huge blow. Not only in the immediate future of course, but these types of things tend to drag on and on and the company loses – regardless of the outcome. As discussed in numerous articles investor and market sentiment play a critical role in stock price – and the last few days will prove extremely painful for Groupon investors and company management for a long time to come.
And to make matters worse competition for the once high-flying company is heating up. LivingSocial is not only catching up with Groupon in monthly visitors but they’re backed by Amazon’s (NASDAQ: AMZN) cash and just as importantly their technological infrastructure. Then there’s Facebook and Google (NASDAQ: GOOG) offers entering the fray – both supported by huge resources and virtually built-in markets.
Though Groupon’s stock price has stabilized after Monday’s slide even contrarian investors should shy away. Though this kind of volatility may be a daytraders dream, Groupon is going to be a nightmare for mid to long-term investors.
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