New dot-com bubble looms ahead of Groupon IPO

Groupon has exploded in 2011, more than doubling its subscriber list to a whopping 115 million folks and solidifying its position at the top of the daily deals heap.

This is great news as company gets ready for its initial public offering sometime this fall. The sheer number of investors of drooling over the chance to snag a piece of Groupon is enough to make one reminisce of the dot-com glory days.

In another throwback to the bubble days, Groupon has caught flak recently for the use of a proprietary accounting metric that pretty blatantly inflated the company’s worth. While the use of strange metrics in IPO filings is nothing new, and not illegal, investors were getting grumpy about shenanigans ahead of what’s expected to be a billion dollar offering.

Groupon called the metric Adjusted Consolidated Segment Operating Income (ACSOI), which is a really snazzy way to refer to a calculation of Groupon’s income that ignores marketing costs. In the all-online, cutthroat world of daily deals, marketing is one of the most massive expenses for the company. In fact, in the first quarter of 2011, Groupon reported a $117 million operating loss. However, the company’s ACSOI (which was also reported on IPO filings) was an $82 million gain, largely because the company spent $180 million on marketing during the quarter.

While it’s not sure whether Groupon was trying to be tricky or coy with the metric, as most accountants reviewing the IPO have more or less made fun of how silly it is, the company has amended its filing and any controversy will surely blow over. But the larger question is whether or not such moves hint at the inflation of another dot-com bubble.

Groupon is essentially a free coupon business with a model that could be, and has been, replicated by any number of startups, and yet its expected to be valued at $15 billion to $20 billion. Speculation that Groupon was using ASCOI to keep their own value bubble inflated aside, the business is worth so much largely because of how big its subscriber base is, especially with the company posting losses. That hearkens back to the first dot-com bubble, when investors were so hungry for anything tech that they’d snatch up anything that seemed of worth, including companies with terrible balance sheets but pushing non-traditional metrics like number of daily users in their accounting.

With a tech resurgence in investing coming with social media, especially with standout LinkedIn’s IPO, and investors drooling over Facebook and Twitter, there’s no doubt that Groupon’s IPO will be a roaring success. But at the same time, if a company is a true superstar, why would it play such chintzy accounting games? The fact of the matter is, having an absurd number of users is certainly enticing, but if its so alluring that investors look past a company’s inability to make money off those users, we might indeed have another bubble on our hands.

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