Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Why Groupon Might Be Worth Only $5 A Share

Is Groupon A Good Stock To Buy?Groupon (NASDAQ:GRPN) shares hit fresh all-time lows at one point this week, but they still are not priced low enough to warrant a buy, says Barry Randall, manager of the Crabtree Technology investment model, citing a potentially new accounting concern.

“Groupon has consistently played fast and loose with issues of revenue recognition and what should be considered net revenue, as opposed to gross revenue,” Randall said in an interview, citing Groupon’s fourth-quarter financial restatement.

A new wrinkle in the story, according to Randall, is a research note this week from analyst Ken Sena at Evercore Partners that cites new potential transparency and disclosure issues at the company.

In a note to clients, Sena took issue with the way Groupon accounted for revenue for some of its Q1 sales.

Sena estimated that about half of Groupon’s first-quarter revenue growth was driven by the company’s Groupon Goods business. According to the note, some of those sales were booked as gross revenue, instead of net revenue — which Groupon reportedly did not make clear at the time of its Q1 conference call. The accounting was later disclosed Sena wrote, in an SEC filing. Several news stories picked up on Sena’s Groupon research note this week.

Company spokesman Paul Taaffe responded to a Venturebeat regarding the potentially misleading treatment of the sales, reportedly saying, “You are so far off base that you risk ridicule.”

Groupon shares fell more than 8% to close at $6.51 on July 26. They rebounded strongly to close at $7.57 on July 27, after rival deals-coupon site LivingSocial reported strong Q2 revenue growth.

Randall continues to take issue with the quality and design of Groupon’s business model. He says that a significant amount of its cash flow is the result of Groupon collecting coupon revenue up front, then paying it back to the merchant over a period of weeks or months.

Companies including Dell (NASDAQ:DELL) have used a similar model over the years, he says, but not to Groupon’s extent. He says that Groupon’s cash flow is only positive because of its strong revenue growth, which until very recently was driven by heavy marketing expenditures.

He adds that Groupon was only slightly profitable, earning 2 cents a share in the first quarter.

What’s a fair price for Groupon?

Randall says it should be trading at $5 a share, about 2 times the company’s revenue.

“It doesn’t really deserve the same revenue multiple of higher-quality-marketing services — companies like Nielsen (NYSE:NLSN) and Arbitron (NYSE:ARB),” he said.

Despite trading at less than a third of its all-time high near $26 following last year’s IPO, Randall said that he does not plan on buying Groupon at its current price.

Note: Start Covesting with as little as $30,000. We mirror the actions of our managers in your account. Talk to us. We can help you find a great investment model that matches your goals.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

Loading Comments...