Will Groupon lower prices on upcoming IPOs?

Questions about the company's numbers are sending the stock lower. This could hurt other social-networking names, including Facebook.

By MSN Money Partner Apr 6, 2012 12:17PM

By Jonnelle Marte for SmartMoney.com.

 

Groupon’s accounting woes are doing for its stock what the company normally does for the prie of massage visits. And investing pros say the daily deal site’s lowered revenues may also discount SmartMoneyenthusiasm for the latest wave of Internet IPOs.

 

Sources tell The Wall Street Journal that the Securities and Exchange Commission is examining Groupon’s (GRPN) revision of its financial results for its first quarter as a public company after the SEC discovered that executives did not properly account for customer refunds. Since then, Groupon's stock has fallen steadily, to around $14. The changes will reduce the company’s revenue by $14.3 million for the fourth quarter and widen its loss by $22.6 million.

 

Some experts say the news shows how difficult it is to monetize the value of a new tech company. "Too often investors get caught up in the frenzy of a well-known company going public," says Tim Keating, the chief executive officer of Keating Capital, which specializes in pre-IPO investments. "Just because a company is familiar, doesn’t make them a great investment."

 

Recently public Internet companies like Groupon can be especially difficult to value because they are often still trying to figure out how to create steady revenue streams from their services, says Devin Pope, a wealth adviser for Albion Financial Group. "They’re not necessarily selling a product that is easy to evaluate," Pope says.

 

Investors may not want to jump in immedately after an IPO because such companies may see their revenues and business models change as they mature, he says. Groupon, for example, at first excluded marketing costs from its accounting, which enabled the company to show a profit even though it was generating losses under standard accounting rules. The company also initially counted as revenue everything it took in from daily deals, but later subtracted the amount it shares with merchants.

 

To be sure, Groupon hasn’t been accused of any wrongdoing. And such early accounting blunders may get less attention in the future if Congress passes new rules under the JOBS Act that would allow companies to work out accounting disagreements with regulators before they go public. And many Internet companies can go on to reward investors and demonstrate value as they mature, says Keating. He points to Facebook, which he says has demonstrated that it can generate steady revenue through advertisements and applications.

 

Groupon did not respond to requests for comment.

 

Still, some advisers recommend that potential investors wait until a company has reported earnings for several quarters and shown that it can generate steady profits before they buy into a newly public Internet company. Jeffrey Bogue, an adviser in North Berwick, Maine, also recommends keeping such investments to less than 5% of your overall portfolio. And of course, investors should be patient, pros say. "Overall, people will look at Groupon as a lesson learned," says Paul Brigandi, a senior portfolio manager of the $5 million Direxion Long/Short Global IPO (DXIIX) fund, which invests in newly public companies. "There’s great upside, but a lot of that is not substantiated yet."

 

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