Groupon (Nasdaq: GRPN) Stock Soars - But Red Flags Are Flying

Groupon Inc. (Nasdaq: GRPN) stock soared Monday after the close when the company reported its first quarterly profit ever.

The world's largest daily deal company earned 2 cents per share in the first quarter of 2012, versus a net loss of 41 cents a share in the same quarter a year earlier. Revenue was $559.3 million, an 89.3% year-over-year increase compared with $295.5 million in the first quarter of 2011.

North American sales leapt 74.6% to $238.57 million, while international sales climbed 101.8% to $320.72 million.

The numbers handedly beat Wall Street's expectations. The consensus estimate from Thomson Reuters was for the company to post earnings of a penny per share on revenue of $531 million.

Following the earnings announcement, Groupon stock skyrocketed nearly 18% in extended hours trading to $11.735.

In morning trading Tuesday, Groupon shares rose more than 20% to $14.93.

CEO Andrew Mason gushed in a statement, "We are pleased to report a record quarter that demonstrates our progress in unlocking the opportunity in local commerce for merchants and customers worldwide."

Looking forward, the Chicago-based company projected second-quarter revenue of $550 million to $590 million, rendering a 40% to 50% year-over-year leap. The Street expects revenue to hit $558.7 million.

The announcement and the stock's ascent comes after shares hit an all-time low of $9.63 during last Friday's trading session. That marked a 52% drop from the company's November 2011 initial public offering price of $20.

But not everyone was sold on Groupon's turnaround.

"While Q1 results are a step in the right direction, we want to see more evidence of sustainability in the model," wrote Herman Leung of Susquehanna.

Jordan Rohan of Stifel Nicolaus, among other analysts, also expressed concern over the expiration of the post-IPO lockup on Groupon's shares. The company said on Monday that those lockups expire on June 1, affecting about 620 million shares.

Skeptics abound and one good quarter does not ensure another.

Groupon Stock: "Foolish" to Buy?

Groupon's infamous accounting issues have tarnished its reputation - possibly irreparably.

Lou Pizzileo of accounting and consulting firm J.H. Cohn LLP in New York told Bloomberg News, "The SEC ran them through the mud on their accounting practices, revenue recognition and the model. All that happened in public purview. That certainly doesn't help post-IPO stock performance."

The negative outlook came on the heels of the Securities and Exchange Commission's mandate that the company revise its financial statements and accounting practices twice before the company's IPO. Then the company got into trouble again after its amended filing on March 30th, when its auditor unearthed issues with how the company handles refunds.

That move prompted the auditor to post a "material weakness" warning on the company's redone books, spurring numerous downgrades on Groupon stock.

In April, Money Morning Chief Investment Strategist Keith Fitz-Gerald tackled the idea that Groupon could be broken enough to be the next Enron. He answered with a resounding no-it's actually much worse.

Fitz-Gerald said Groupon's accounting missteps have helped turn some investors into "fools."

"Don't confuse the promise of real companies with real products, dividends and cash flow with the greater fool theory - as in some greater fool is going to come along and pay you more than you paid at an undetermined point in the future," said Fitz-Gerald. "The vast majority of social media companies have terribly flawed business models."

In addition, Fitz-Gerald cited a MarketWatch article published one day before Groupon's IPO that revealed insiders and early investors cashed out of about $943 million of a total $1.12 billion total raised in venture funding, a red flag that should not be overlooked.

In the past year, among the 10 U.S. consumer Internet companies to go public, Groupon has fared the worst.

As Fitz-Gerald cautions, the only people so far getting rich off Groupon stock are insiders and underwriters.

"Social media stocks are not investments; they are speculation in its purest form," said Fitz-Gerald. "If you've got the stomach for it and want to risk the money, fine. That's your decision. But invest in any social media company at your own risk."

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