Groupon Shareholders: I Hope You Read the Fine Print

I think the "I'm new" excuse can only be used one time. I refer to it as the "one mulligan and you're done" rule. Daily-deal website Groupon (NAS: GRPN) broke that unwritten rule on Friday.

For the second time in less than seven months, Groupon was forced to restate its earnings results. The reasoning this time was that it needed to keep more of its cash in reserve since it has been dealing with higher-priced social deals that could potentially result in larger refunds. The accounting change reduced total fourth-quarter revenue by $14.3 million and widened its already unexpected quarterly loss by an additional $22.6 million, or $0.04 per share. If you recall, Wall Street had actually expected Groupon to earn $0.08 during the quarter.

As I mentioned, this isn't Groupon's first go-around in the restatement department. Before it launched as a publicly traded company last year, the SEC kindly nudged Groupon into changing the way it accounted for revenue. In years past, Groupon would count the full value of the coupon as revenue without accounting for the value its merchants would get. The restatement in September more than halved its 2010 total sales from $713.4 million to $312.9 million. At the time, this restatement also reduced revenue in the first six months of 2011 by nearly 60%.


Not surprisingly, Groupon went through two CFOs last year; both chose to leave after short stints with the company.

How difficult is it to get your accounting facts straight? Not only that, but who releases accounting errors on a Friday evening after the market is closed?

If my suspicions about Groupon's business model weren't fully apparent before, they certainly are now. Back in November, I listed five reasons to avoid Groupon and, I'm proud to say they still hold true today.

The biggest detriment to Groupon's business model is its limited barrier to entry. Anyone with a reasonable amount of cash could create a daily-deal site. At the peak of 2011, 530 daily-deal sites existed, yet it should be noted that 170 of them closed up shop.

You're probably now wondering why so many daily-deal sites were shuttered if the barrier to entry is so small. That's because the cost of acquiring customers in light of the increasing competition is going through the roof. According to The Wall Street Journal, Groupon's cost for acquiring a customer ballooned from $8 in 2010 to $23.50 in 2011. It's no wonder that even with a sizable chunk of the daily-deal market share it can't turn a profit or keep its books in order.

Groupon also isn't getting any help from its larger peers that it should be relying on. Amazon.com (NAS: AMZN) made a $175 million investment in Groupon's rival LivingSocial in late 2010. Google (NAS: GOOG) , which was largely expected to acquire Groupon, purchased The Dealmap last year to incorporate local deals into its Google Maps platform and also runs its very own Google Deals daily service. Even Microsoft (NAS: MSFT) is offering a daily-deal service under the name MSN Offers. The money is out there; Groupon just isn't capitalizing on it as many had expected.

The news of more accounting snafus adds more fuel to the fire that Groupon is wandering aimlessly and crossing its fingers in the hope that everything goes as planned. That's not how I invest, and I really, really hope Groupon shareholders are reading the fine print that comes along with owning this bipolar stock.

Groupon may not meet the requirements to be called The Motley Fool's Top Stock for 2012, but there is a company that our chief investment officer finds irresistible. Find out why he chose this stock as his top pick this year.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He thinks Groupon may want to consider putting an ad in the newspaper for a "qualified" CFO. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Amazon.com, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com, Google and Microsoft, as well as creating a bull call spread position on Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs a restatement.

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