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Groupon's Reality: Growth, Accounting, and SEC Questions

Groupon
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Groupon

It's been a week since Groupon filed its S-1 with the SEC to go public, and now that investors have had some time to dig into the massive document, some major questions are starting to arise.

On the surface the company's revenue looks massive and its growth meteoric.

But behind those dizzying numbers are some serious issues investors are examining very closely. The big question- what is this company really worth?

It's reportedly looking to raise $20 billion to $30 billion with its IPO. Is that fair?

GROWTH

Groupon's massive growth seems like it will be very difficult to maintain. Forrester Research's e-commerce analyst Sucharita Mulpuru points out that $615 million of Groupon's $700 million plus in revenue last year came from acquisitions, marketing and expanding into new markets. The company's "truly organic" growth is just less than $100 million. Groupon's growth is still impressive - 223 percent last year. But at a 20 times multiple that would put its valuation around $2 billion, not $20 billion.

REVENUE ACCOUNTING

Groupon accounts for its revenue differently than say eBay, and in a way that some say is misleading to potential investors. The company defines revenue as "the purchase price paid by customers." Then there's the issue of "the cost of revenue," leaving the company with what it calls "gross profit," which is "the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant."

Here's the thing: Many companies like eBay , which also take a fee for transactions, would consider that "gross profit" number a "net revenue number." UCLA Anderson School's accounting lecturer Gordon Klein says the S-1 uses terms in a way he's never used them before, and this unusual accounting tells him that investors should "run from the stock." Others say this is a non-issue: Wedbush securities analyst Lou Kerner says that the company has done a totally adequate job outlining its accounting approach. Kerner says whether the company reports its revenue before or after direct costs should have zero impact on investors evaluation of the company.

SEC VIOLATION?

Groupon's largest shareholder, Eric Lefkofsky was quoted in a Bloomberg story on June 3, within the company's "quiet period," saying the company " is going to be wildly profitable." He made the comments just one day after the company filed its IPO. And it just so happens that the prospectus indicates that the company is not, at least not at this point "wildly profitable." It appears that this comment is in response to questions about the company's profitability raised by the S-1.

Groupon will not comment on whether it has any plans to re-file with the SEC, citing the quiet period. The SEC declines comment as well. But sources familiar with the situation say it does look like this comment could be in violation of the quiet period. It's safe assumption that the SEC is looking into this issue. It's yet to be determined whether Lefkofsky's remarks are "materially different" from what has been said before, or whether the circumstances have changed so dramatically, it changes the nature of the comments.

Questions? Comments? MediaMoney@cnbc.com

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.