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The Danger with Investing in Groupon
Posted by: Profit Confidential (IP Logged)
Date: April 11, 2012 06:32AM

We all love technology. It has enhanced our lives and created many new opportunities to make money. In this rush to boost corporate earnings, an investor might be a bit too eager to try and jump in the pool of technology stocks and could get burned in a fad. An investment strategy that has a long-term view is the best approach. The problem is that I don’t see Groupon Inc. (GRPN) lasting that long at all.



Chart courtesy of www.StockCharts.com

Of all the technology stocks out in the market, Groupon is one that I certainly wouldn’t recommend. Investing in technology stocks is supposed to be about cutting-edge innovation, which is missing with Groupon. The company’s entire business model is questionable and, with such low barriers to entry and now restatements to its corporate earnings, all I see are warning signs to stay away from Groupon.

Groupon was forced to add higher refund reserves, which hurt corporate earnings, losing $64.9 million in the fourth quarter versus the previously stated amount of $42.7 million. Basically, when it “sells” coupons, it books the revenue at the time; but, if there are refunds, the company has to take that back out of corporate earnings. The problem is, Groupon has no way of knowing how many coupons were used, how many are left, and how many will be refunded. Its cash statements are almost useless, as, in theory, most of it could be wiped out with refunds. Some estimates are that up to $750 million in refunds, which are really liabilities, aren’t stated properly in the company’s corporate earnings reports.

Another worry is that a huge portion of shares are eligible to be sold on the market in the post-IPO locked-up period in May. Considering that insiders have cashed out 84% of their holdings, I can see even more insiders dumping their shares. With corporate earnings being restated now and the Securities and Exchange Commission (SEC) forcing Groupon to restate two times before it even went public, I have no trust that management knows how to properly run a firm. I’m not the only one with this view; the company’s own accountant, Ernst & Young, stated that these mistakes weren’t one-time events, but that there is material weakness in Groupon’s internal financial controls and that it (Ernst & Young) could not assure the accuracy of Groupon’s financial statements. Yikes! Would you really put your hard-earned money in a company with that reputation? I certainly wouldn’t.

As with all technology stocks with questionable financial statements (or any stocks for that matter), out come the lawyers. Several lawsuits have now been filed alleging violations of federal securities laws for misleading statements and breaches of fiduciary duties by Groupon directors and officers.

Not only are the corporate earnings questionable, but also this sector of online retailing can be replicated by numerous other technology stocks. When technology stocks see corporate earnings are going up, they will jump in and compete, and then an investor has to evaluate which management they trust to lead the battle. Groupon’s management has repeatedly made questionable decisions that we are now seeing just the tip of the iceberg with these corporate earnings revisions. I certainly wouldn’t invest in technology stocks with such low barriers to entry and their own accountants stating that they can’t assure investors that the corporate earnings reports are accurate. Now investors have to deal with lawsuits and a ton of new stock to hit the market in May. I think there are much better technology stocks out there to invest in with strong corporate earnings and without these dark clouds hanging over them.



Stocks Discussed: GRPN,
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