Groupon, Inc. and Value

In its simplest form, value is a function of cash flows and risk. For any business, its value is dependent on the level and timing of future cash flows and the perceived risks in realizing those future cash flows. Therefore, the valuation process is primarily a forward looking concept although the past can provide clues to the markets’ perception of value. Generally speaking, higher growth rates translate into higher values, although beware if growth doesn’t translate into increased profits.

Groupon, Inc. (Nasdaq GRPN) priced its IPO at $20 share and debuted in November 2011 with an implied value of $13 billion. In May 2012, after a series of financial reporting blunders, its market value was reduced 50% as its stock price fell to just under $10 per share. The company’s stock has been in a free fall since July 2012, falling from $9.51 per share on July 2, 2012 to $4.44 at the close of trading on August 24, 2012. This is despite the fact that year over year revenues and earnings have improved.

The lesson, investors’ perceptions changed dramatically when Groupon’s financial restatements lowered revenues and earnings. In addition, investors are recognizing there are low barriers to entry and rising competition (Living Social). The result, lower stock value as perceived risk moved higher and future cash flows moved lower.