“Groupon has consistently played fast and loose with issues of revenue recognition and what should be considered net revenue, as opposed to gross revenue,” Randall said in an interview, citing Groupon’s fourth-quarter financial restatement.
A new wrinkle in the story, according to Randall, is a research note this week from analyst Ken Sena at Evercore Partners that cites new potential transparency and disclosure issues at the company.
In a note to clients, Sena took issue with the way Groupon accounted for revenue for some of its Q1 sales.
Sena estimated that about half of Groupon’s first-quarter revenue growth was driven by the company’s Groupon Goods business. According to the note, some of those sales were booked as gross revenue, instead of net revenue — which Groupon reportedly did not make clear at the time of its Q1 conference call. The accounting was later disclosed Sena wrote, in an SEC filing. Several news stories picked up on Sena’s Groupon research note this week.
Company spokesman Paul Taaffe responded to a Venturebeat regarding the potentially misleading treatment of the sales, reportedly saying, “You are so far off base that you risk ridicule.”
Groupon shares fell more than 8% to close at $6.51 on July 26. They rebounded strongly to close at $7.57 on July 27, after rival deals-coupon site LivingSocial reported strong Q2 revenue growth.
Randall continues to take issue with the quality and design of Groupon’s business model. He says that a significant amount of its cash flow is the result of Groupon collecting coupon revenue up front, then paying it back to the merchant over a period of weeks or months.
Companies including Dell (NASDAQ:DELL) have used a similar model over the years, he says, but not to Groupon’s extent. He says that Groupon’s cash flow is only positive because of its strong revenue growth, which until very recently was driven by heavy marketing expenditures.
He adds that Groupon was only slightly profitable, earning 2 cents a share in the first quarter.
What’s a fair price for Groupon?
Randall says it should be trading at $5 a share, about 2 times the company’s revenue.
“It doesn’t really deserve the same revenue multiple of higher-quality-marketing services — companies like Nielsen (NYSE:NLSN) and Arbitron (NYSE:ARB),” he said.
Despite trading at less than a third of its all-time high near $26 following last year’s IPO, Randall said that he does not plan on buying Groupon at its current price.
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