Groupon’s accounting woes are doing for its stock what the company normally does for massage prices. And investing pros say the daily deal site’s lowered revenues may also discount enthusiasm for the latest wave of Internet IPOs.
Sources tell the Wall Street Journal that the Securities and Exchange Commission is examining Groupon’s (GRPN) revision of its financial results for its first quarter as a public company after discovering executives did not properly account for customer refunds. Since then, its stock has fallen 20% to $15.30. The changes will reduce the company’s revenue by $14.3 million for the fourth quarter and widen its loss by $22.6 million. Some experts say the news shows how difficult it is to monetize the value of new tech companies. “Too often investors get caught up in the frenzy of a well known company going public,” says Tim Keating, chief executive officer of Keating Capital, Inc, a company that specializes in pre-IPO investments. ”Just because a company is familiar, doesn’t make them a great investment.”
Recently public web companies like Groupon can be especially difficult to value because they are often still trying to figure out how to create steady revenue streams from their services, says Devin Pope, wealth adviser for Albion Financial Group. “They’re not necessarily selling a product that is easy to evaluate,” says Pope. Investors may not want to jump in right after an IPO because these companies may see their revenues and business models change as they mature, he says. Groupon, for example, at first excluded marketing costs from its accounting, which enabled the company to show a profit even though it was generating losses under standard accounting rules. The company also initially counted as revenue everything it took in from daily-deals, but later subtracted the amount it shares with merchants.
To be sure, Groupon hasn’t been accused of any wrongdoing. And such early accounting blunders may get less attention in the future if Congress passes new rules under the JOBS Act that would allow companies to work out accounting disagreements with regulators before they go public. And many Internet companies can go on to reward investors and demonstrate value as they mature, says Keating, pointing to Facebook, which he says has demonstrated that it can generate steady revenue through advertisements and applications. Groupon did not respond to requests for comment.
Still some advisers recommend waiting until a company has reported earnings for several quarters and shown that it can generate steady profits before they invest in a newly public Internet company. Jeffrey Bogue, an adviser in North Berwick, Maine, recommends keeping such investments to less than 5% of your overall portfolio. And of course, investors should be patient, pros say. “Overall, people will look at Groupon as a lesson learned,” says Paul Brigandi, senior portfolio manager of the $5 million Direxion Long/Short Global IPO fund, which invests in newly public companies. “There’s great upside but a lot of that is not substantiated yet.”