Looking at Groupon’s Pre-IPO Valuation Jitters, $7.9 Billion Trefis Value

As Groupon begins trading in public markets, we look back into its short history to see how the company’s market valuation has fluctuated since its inception. In recent months the firm has come under severe scrutiny for some of its accounting practices, cash burn rate, and other financial details that have been revealed in the SEC filings, which have been revised several times. Last month, Groupon restated the way it accounts for revenues to reflect a more conservative set of numbers for revenue recognition purposes. It also announced that it had lost its second COO in less than a year. The firm is also facing increased competition from Google (NASDAQ:GOOG), LivingSocial, Amazon and hundreds of other smaller start-ups.  Recent market volatility and renewed global concerns about the health of the global economy aren’t helping in any fashion either.

As a result, Groupon’s expected valuation has fluctuated substantially over the last year. Below we discuss a few key factors and perceived risks that could have led to these significant changes.

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Information Obtained from Publicly Available Sources

Creative Accounting Practices and High Marketing Expenses

Since the launch of Groupon’s first pre-IPO S-1 filing in June, the company has come under flak for its unconventional accounting metrics, the chief one being the adjusted consolidated segment operating income or ACSOI. This non-GAAP metric, which shows operating income does not take into account the marketing expenses incurred by Groupon. The metric came around as being especially suspicious to investors, considering that Groupon’s marketing expenses are quite significant and have crossed the $600 million mark for the first nine months of 2011 alone. Hopes for a $25 billion valuation which some had expected a few months back were soon dashed as Groupon released its numbers indicating concerns about the company’s business model and the daily deals business in general.

Uncertainty in Global Markets

Prolonged market volatility and uncertainty over the global economy have put the market for offerings in a deep freeze since the middle of August. Companies such as Liberty Mutual and Glacier Water Services which were supposed to I.P.O. recently have withdrawn their applications and others such as Zeltiq Aesthetics have priced their stock well below the expected range.

Groupon’s PR Mishaps

Groupon also landed itself in trouble with the SEC by failing to adhere to the “quiet period” norms which prohibit a company from making public announcements for  a specific duration before it goes public. After the release of Andrew Mason’s leaked memo, which contained forward looking financial statements, investors started becoming more wary of the company’s leadership and conduct.

Increasing Competition

With low barriers to entry and a highly duplicable business model, Groupon’s competition is only expected to increase further. In addition to the big players such as LivingSocial and Google Offers, the daily discount market is flooded with hundreds of daily deal clone sites. This is expected to make the market more fragmented in future, making it difficult for Groupon to maintain its dominance. We believe this visible increase in competition in the last several months has contributed to the fall in valuation for the company.

We recently launched coverage on our analysis of Groupon with a $7.9 billion valuation estimate.

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