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What’s Next For Groupon (GRPN): Breakout Or Bankruptcy?

 April 26, 2012 09:42 AM

(By Louis Basenese) Daily deal juggernaut, Groupon (Nasdaq: GRPN), has been getting clobbered lately, which I predicted repeatedly (see here, here, here and here).

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Yet the selloff – from a post-IPO high above $31 to a recent low around $11 – has convinced some analysts that the stock is suddenly a compelling investment.

On Monday, Evercore analyst, Ken Sena, raised his rating on Groupon to "Overweight" from "Equal Weight." He now considers it an "attractive entry point."

Come again, Ken?

A falling stock price – even a dramatic 64.6% selloff like in Groupon's case – doesn't make a company suddenly attractive. Not unless the underlying business is strong. And when it comes to Groupon, its business hardly qualifies as such.

11 Reasons Groupon is a Goner

Groupon's list of unattractive fundamentals is long. Really long. So I'm going to just jump right in…

1. Less Than Reliable Accounting

Before Groupon went public in November 2011, the SEC clamped down on its use of misleading accounting metrics. Specifically, consolidated segment-operating income (CSOI).

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Since that time, the company's restated earnings. And revealed "a material weakness" in accounting controls, prompting another SEC investigation.

I might be willing to overlook one accounting "snafu." But three? Not a chance.

2. Obscene Marketing Expenses

I've noted before that Groupon's business requires it to spend on marketing to acquire new subscribers. But it's getting ridiculous.

In 2011, Groupon spent $768.5 million on marketing, up 164% from 2010. That's equivalent to 48% of total revenue.

In comparison, OpenTable (Nasdaq: OPEN), which also boasts a subscriber-based model, only spent 20.6% of revenue on marketing last year.

3. Uncomfortably High Overhead

As a result of ramping up its sales force from 128 people (March 2010) to 5,196 (December 2011), Groupon carries a hefty overhead burden.

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