Tuesday, August 21, 2012

Groupon: Poster Child of Social Media Bubble?

We've heard about the Groupon investors heading for the exits, including some of the early and later round VC investors who now claim that they told the company it was not ready for an IPO.  I can't find the exact reference, but I read that an investor counseled the company that its business metrics might not stand up to Wall Street scrutiny.

What I don't understand about that comment is how could the Groupon metrics stand up to the scrutiny of the late stage private equity investors?  Do these investors use some imaginary, alternative accounting standards?  Either the business model and metrics are real or they are not.  Whether the company is public or private should be irrelevant to that issue.

Advertising industry analyst Rakesh Agrawal put our concerns into more colorful language when he called Groupon's business model "a loan sharking business."

The accounting professors at Grumpy Accountants point out a questionable accounting gain from a swap of equity stakes in Chinese companies in Groupon's last quarter.  The economics of this accounting maneuver should have been questioned by Groupon's auditors, and it's not a new dodge to boost earnings.  The one which is more telling, is the fact that the company and its auditors acknowledge that Groupon may not be able to benefit from its tax losses capitalized in deferred tax assets.  Why?  Because the prospect of Groupon generating taxable income from its current business model may be unlikely.  In that case, the auditors should be considering a "going concern" opinion at some point.  In the quarter, the company increased the valuation allowance against the deferred tax asset.  Perhaps the management talked the auditors out of this opinion for the quarter by appealing to the "new" Groupon Goods business model.  Either way, the business model is the fundamental problem for the tone deaf management team. 

We've had the "Internet bubble," and a few years from now, scholars will be writing about the "social media bubble."  If I can paraphrase the Dos Equis spokesperson about Wall Street, "Stay cynical, my friends."

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