The last time many long investors checked in on the global leader in "daily deals," it wasn't a pretty sight. The social media darling had been caught red-handed by its own auditors engaging in overly aggressive accounting.
According to Ernst & Young, Groupon, Inc. (NASDAQ:GRPN) failed to set aside sufficient funds in the fourth quarter of 2011 to cover potential refunds to customers. And the "oversight" enabled the company to post higher revenue and a smaller loss than it actually achieved.
Thanks to the auditors, Groupon was forced to restate its quarterly results.
But the damage had been done. GRPN shares plunged nearly 17% the day the news came out. At the time, warnings were issued to investors to steer clear of Groupon. Nothing decimates a stock like a good old fashioned accounting scandal. You see, Groupon's slide didn't end with that big one-day drop. Nope... the shares continued moving lower.
In fact, GRPN had shed nearly 60% of its value prior to releasing its second quarter earnings.
But despite the huge drop in share price, many investors were expecting the stock to rally on Groupon's second quarter numbers. But they were fooled once again.
Last week, the company released another disappointing quarterly earnings report.
Revenues surged 45% to $568 million, but they missed analysts' lowered estimates by $7 million. What's more, the company experienced its first ever quarter to quarter decline in gross billings. Management blamed Europe for the revenue shortfall.
You see, Groupon generates more than half its revenues from overseas, with the lion's portion coming from Europe. The region's financial crisis and recession fears clearly took a bite out of sales during the quarter. And, while earnings beat estimates, investors were not impressed.
Groupon achieved a profit of 8 cents per share compared to a loss of $0.35 per share in the year ago quarter. Analysts were expecting earnings of just 3 cents per share.
But investors had no opportunity to enjoy the upside surprise.
Management killed any potential for a rally when they lowered guidance for the current quarter. While analysts had been expecting third quarter earnings of $80 million, management said they will likely come in between $45 and $65 million.
That's a projected shortfall of anywhere from 19% to 44%!
As a result, GRPN shares plunged again.
The stock dropped 27% to $5.51 per share in the very next trading session. And it has continued to give up ground ever since. On Friday, GRPN closed at just $4.75 per share. At that price, GRPN is now 76% below its IPO price of $20 per share and considered a penny stock. And it's down a whopping 85% from the all-time high of $31.14 achieved on its very first day of trading as a public company.
To put this another way, GRPN investors have lost a mind-boggling $10 BILLION in less than 10 months.
So, with the shares down so much so fast, they must be a good buy... right?
Not so fast... The European financial crisis has yet to be resolved. And slower growth, if not an outright recession, is on the horizon for the Old Country. With more than half of Groupon's sales coming from overseas, it's hard to see it generating any revenue and earnings growth momentum in the near future. And given management's history of overly aggressive accounting, the risk of an accounting scandal is just too great.
Don't get sucked into the GRPN value trap. You'll be a lot better off investing your hard earned dollars somewhere else.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.