Shares of Groupon (GRPN) fell 6% in after hours trading on Friday after the company restated its fourth quarter earnings. Groupon found material weaknesses in its internal accounting controls.
Accounting restatements
The revisions that the company made were related to an "increase in the refund reserve account and reflects a shift in the deal mix and higher price point offers". Essentially it means that customers where unhappy with their purchases and requested more in refunds from Groupon.
As a result, the company restated its fourth quarter earnings by over $22 million which leads to a restatement and a loss of $65 million for the final quarter, or $0.12 per share. Revenues were restated from $506 million to $492 million.
The issue was found by its independent auditor Ernst & Young which noted the internal weakness in internal control for financial reporting. The company responded by hiring another external auditor to run through its accounting practices.
Last September, the company shocked the investment community by a restatement of its accounting practices. After the accounting revision, the company had to report a 55% decline in its revenue. This latest restatement feeds the negative sentiment regarding the financial disclosure of the company as it had to restate its financial statements for the second time in six months.
Outlook
Groupon previously issued a revenue outlook of $510-$550 million for the first quarter of 2012. Income from operations is expected to come in at $15-$35 million. The latest revision of the accounting statements for the fourth quarter of 2011 has no consequences for the previously issued outlook for the first quarter. Analyst are expecting Groupon to generate $534 million in revenue for the first quarter and expect the company to generate net profit of $23 million.
Valuation
Incorporating a 6% decline in after-hours trading, the market values Groupon at roughly $11 billion. Excluding cash and equivalents of little over $1 billion, this values the company at 6.2 times annual revenue in the year in which the company lost $257 million.
What justifies this valuation? Stellar growth.
For the second half of 2011 the company generated $935 million, compared to $690 million for the first half year. Net losses for the second half declined to $53 million compared to $204 million in the first half. At this pace the company is on track to continue revenue growth for 2012 and report an annual profit for the first time in its history.
Investment Thesis
Groupon continues to report stellar revenue growth and will most likely return to profit in 2012. Despite this good news shares trade roughly 10% below its initial public offering price as shares have reacted on the revision of accounting statements, an increase in refund reserves and problems with merchants and customers as the quality of offerings is sometimes outright bad.
In a mere three years Groupon has grown from inception to a multi-billion company which is an enormous achievement. If the company can resolve accounting issues and quality issues which are a result of growing pains, it may deserve a higher valuation and should recover to levels above its initial public offering price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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