Thursday, July 28, 2011

Groupon's Financial Gymnastics

Excerpts from this Wall Street Journal article on Groupon's practices leading up to its initial public offering:

Groupon's Accounting Lingo Gets Scrutiny

Newfangled Accounting Metric
Groupon Inc. has attracted scrutiny from regulators over a newfangled accounting metric...

Dot-Com Boom Redux?
The financial gymnastics harken back to Silicon Valley's late 1990s dot-com boom...

Adjusted CSOI
Groupon...has highlighted in regulatory filings something it calls "adjusted consolidated segment operating income," or adjusted CSOI. Investors and analysts said that draws attention away from marketing costs, which are causing the company to hemorrhage money.

Adjusted CSOI?

That's certainly bold and imaginative if nothing else. Not exactly a compliment when you are talking about accounting.

This company cannot be serious about selling that kind of metric to investors.

In the article, portfolio manager Ben Strubel said it best:

"In essence Groupon is asking investors to look at their profit before any expenses..."

I've said in previous posts it's best to own companies that foster a conservative accounting culture. I don't think Groupon is going to meet that criteria.

This reminds me of the late 1990s more than anything else I've seen lately but, even if there are some specific excesses, we seem a long way from a more generalized problem.

Well, at least so far that is.

Maybe not as enthusiastically at current prices, but I'll stick with the Google's (GOOG) and Apple's (AAPL) of the world.  Both are also growing plenty fast and produce exceptional returns on capital.

Highly profitable, real businesses, with fortress balance sheets.

No accounting gimmicks required.

Adam

Related post:
Technology Stocks

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