There was a lot of hype about Groupon (GRPN) during the IPO phase. And rightfully so, Groupon owners wanted to create as much of a buzz as possible about the stock so they can get a very high market valuation of the company and more money in their pockets. However, times are tough now and after trading over $30 a share on the first day of trading, the stock is now trading at just over $16 a share as the bullishness about the company and business model has come down. Even now, assigning a value of $8.5 billion to the company seems foolish as Groupon has no competitive advantage that will stop any other company of entering the niche industry. For an idea of how extreme the valuation is, one doesn't have to go too far. The company is currently trading at a price to book ratio of 13.5. Even Google (GOOG), a highly successful internet company with a history of success is only trading at a 3.6 multiple. Apple (AAPL), the darling of the stock market, is trading at a price to book ratio of 6.2. This suggests that Groupon has much further south to go. Analysts, however, are very bullish on the stock with a consensus target of $25 a share, upside of over 50%. The big question is why are the analysts bullish? Are they just trying to bring more IPO business in the future for their investment bank by having a high valuation? Or do they actually believe the valuation they are assigning Groupon?
To make matters worse, the company, just six months into its status as public company, already has discovered some accounting issues. Last week, the company revised Q4 results. The revisions resulted in a reduction to fourth quarter 2011 revenue of $14.3 million. The revisions also resulted in an increase to fourth quarter operating expenses that reduced operating income by $30.0 million, net income by $22.6 million, and earnings per share by $0.04. Groupon noted that the revisions are primarily related to an increase to the company's refund reserve accrual to reflect a shift in the company's fourth quarter deal mix and higher price point offers, which have higher refund rates. That, however, wasn't the end of Groupon's problems. The company also said that its independent auditor included a statement of a material weakness in its internal controls over its financial statement close process.
I believe that the downside here is tremendous despite the stock already taking a near 50% haircut from its IPO price. My big concern here is what is the competitive advantage Groupon has that will protect it from other companies competing with Groupon? There are already plenty of coupon sites out there that are similar to Groupon. I would stay away from the stock for sure and actually consider it as a short here. Analysts are still too bullish on the stock and the hype from the IPO phase is still supporting the stock valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.