A few initial thoughts on the Groupon S-1. I will have an updated post later tonight.

• The key takeaway from Groupon’s amended S-1 is that the company’s best days in terms of revenue growth are behind it. Groupon has been selling investors an aggressive growth story. That story is collapsing. Sequential revenue growth went from 76% to 26%.
• Based on the Q2 numbers, I would estimate that Groupon is holding between $500 million and $750 million in gift card liabilities that it is not showing on its books. Again, no one, not even Groupon knows the exact number.
• The key numbers for investors to focus on are gross margin %, customer acquisition cost (not disclosed by Groupon but it can be calculated) and sequential revenue growth. The gross margin dropped 3.1 percentage points from Q1. Although that number has been volatile, I expect that number to collapse from its current 38.8% to the 10-15% range as merchants get wiser about the economics and competition strengthens. The comparable number in the American Express/Facebook relationship would be 3-4%. The company’s customer acquisition costs are substantially higher than those of Netflix.
• With emerging industries, there are always questions about how to account for things. But Groupon continues to take every opportunity it has to make its numbers appear better to investors than they really are. Zynga is an interesting comparison. If you buy a virtual tractor from Zynga (something that costs almost nothing for them to produce), they recognize revenue from that over the expected life of the game. Groupon takes things that have significant real costs and recognizes revenue immediately. Not only do they recognize the revenue immediately, they also recognize money they never see.
• It is easy to manipulate the top line revenue numbers that Groupon is reporting. Investors should ignore it all together. Consider what Groupon wrongly calls “gross profit” as “topline revenue”.
• Groupon continues not to report critical numbers like email open rates, unsubscription rates (churn) and customer acquisition costs.
• To reiterate, I’m not saying Groupon is doing anything illegal with respect to accounting. (There are things they are doing that are illegal.) They rightfully got beat up for Adjusted CSOI. But in some ways, that was like a magician’s trick…. it was a distraction to deflect your attention from the other problems in its numbers.
• In my conversations with investors I’ve seen a lot of short interest in Groupon. (I even had one short ask me to stop writing about the company.) I expect that today’s amended S-1 will only increase that short interest.
• It is important for investors to understand that Groupon is a sales and marketing company, not a technology company. Groupon employs more people writing pithy editorial descriptions than writing code. As of June 30, fewer than 400 wrote software.
• It will scale as a sales and marketing company does — poorly — and should be valued as such. It’s employee growth is scary. Groupon has gone from “over 7,000 employees” on June 1 to “over 9,600 employees” on August 9.