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Investing in Groupon is a bad deal, say experts

grouponIn case you hadn’t heard, daily deals giant Groupon recently filed its S-1 with the Securities and Exchange Commission, a necessary step before an initial public offering. The company wants to raise $750 million in its IPO. Unfortunately, many of the company’s financial details revealed in the S-1 paint a less than enticing picture for possible investors.

For starters, Groupon is “operating like a Ponzi scheme that needs constant infusions of cash to stay afloat as it’s hemorrhaging money,” says Conor Sen of Minyanville.com. According to its balance sheet, Groupon is currently “$230 million in the hole” — not a big deal for most young companies with the massive growth Groupon is experiencing. Problem is, says Sen, they’re also “wildly unprofitable,” which means that the company is “”effectively insolvent.”

In other words, even though Groupon brings in a staggering revenue — they could generate as much as $3 billion this year — the company has spent dump trucks worth of cash, and they seem poised to drive freight trains of money off a cliff, and into a blue-hot inferno of business expansion, for the foreseeable future.

Of course, many would argue that the money they are spending isn’t wasted at all. The company has new competitors popping up constantly — everyone from The New York Times to Google has a daily deals scheme in the works. Groupon simply needs to lay out the cash today in order to stay competitive tomorrow. That’s just how it works. But how long can Groupon keep up its spending spree before it simply buckles under the pressure of its own downward spiral? That, folks, is the question on many investors minds at the moment.

If a black hole of debt were the only issue, investors would giddily line up to grab a piece of a company that’s growing at Groupon’s current clip. After all, Amazon hadn’t made any money when it went public, and look at it now! But deeper analysis of Groupon’s market shows that the daily deals enthusiasm has already begun to wane. And the fact that the company disregarded the “Generally Accepted Accounting Principles” (GAAP) when calculating its financial data only adds to the investor boot-shaking.

Some say, however, that critics are completely underestimating Groupon’s potential.

“They need to get out in front of this. And that’s what they’re trying to do,” writes MG Siegler on his blog. “If you look at the actual breakdown, most of the money is being spent internationally. In the U.S., they’re actually near break-even. If they can get a strong enough foothold and ensure Google and Facebook don’t run them over, they can pull back that spending substantially. And guess what will be left? A sh*t ton of money. Profit.”

In short, nobody knows for sure that investing in Groupon is a bad bet. The company could continue its meteoric rise, and make a bunch of people a bunch of money, and they’ll all be laughing at the naysayers, all the way to the bank. Or the fad could end. Groupon could stop bringing in mind-blowing amounts of cash, and not be able to make good on its promises to vendors. And then the critics will be proven right. Those who held back will have nothing to offer but a healthy dose of “I told you so” — and a nice chunk of saved cash.

Edited for clarity and updated with additional details at 1:10am EST.