Although I might not be the best writer it is good to know that the contributors to the site add some value!
Ben Strubel of Strubel Investment Management LLC, writes on a regular basis for Value Walk. Ben is even smarter than I initially realized; we have met in person and I was blown away by the depth of his knowledge. He has a fantastic understand of macroeconomics, understands companies across various industries, and knows a good amount of military history as well.
Einhorn’s FOF Re-positions Portfolio, Makes New Seed Investment In Year Marked By “Speculative Exuberance”
It has not just been rough year for David Einhorn's own fund. Einhorn's Greenlight Masters fund of hedge funds was down 3% net for the first half of 2020, matching the S&P 500's return for those six months. In his August letter to investors, which was reviewed by ValueWalk, the Greenlight Masters team noted that Read More
Ben wrote a recent article about Groupon, which can be found here-Groupon Investors Should Pass on This Coupon Deal where he questioned the accounting methods used by the company. Below is a brief excerpt from the article:
Also from Groupon’s S-1 is this statement about how they measure the business.
“We don’t measure ourselves in conventional ways.
There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we’re creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth. “
Basically Groupon would like you to value them based on the income they earn before a bunch of (expensive) costs they incur to earn said income. Of course it’s not really a surprise when you look at the financial statements.
Marketing and acquisition costs per subscriber and per “Groupon” are climbing. Even if you back out the cost of acquisitions and just use the marketing cost line item the cost per subscriber has doubled. Given all the competitors popping up lately this shouldn’t be a surprise.
The Wall street Journal ran a front page story on Groupon’s accounting today. It seems that even the SEC is questioning the metrics used by Groupon (I say “even” because the SEC usually gets involved once investors have lost all their money and the scandal has been exposed by smart/diligent analysts; see Chinese fraudulent RTOs, Bernie Madoff, Enron, Allied Capital and many other companies for further analysis). In this case the SEC is actually doing something before the company has gone public yet. The SEC is questioning Groupon’s use of Adjusted Consolidated Segment Operating Income, or Adjusted CSOI, which Ben described above.
Zynga uses another wacky metric called “bookings”. Total Bookings in 2010 were ~$840 million, compared to revenue of ~$600 million.
Here is how Zynga explains Bookings in the S-1:
Bookings is a non-GAAP financial measure that we define as the total amount of revenue from the sale of virtual goods in our online games and advertising that would have been recognized in a period if we recognized all revenue immediately at the time of the sale. We record the sale of virtual goods as deferred revenue and then recognize revenue over the estimated average life of the purchased virtual goods or as the virtual goods are consumed.
Facebook is considering using a measure called MAU (Monthly Active Users ). I have no idea what all these terms mean but it is clear that MAU is not really how many people are using the site. Any of the following are counted as MAU:
– mock ajax request
– fbml link click
– canvas page view
– message attachment
– fbjs ajax
– accepting a request
– viewing a profile tab
– publishing something via a publisher
Below are Ben’s comments followed by a link to the full WSJ article.
While it isn’t unusual for companies to use nonstandard financial measurements, Ben Strubel, a portfolio manager with Strubel Investment Management, a money management firm in Lancaster, Penn., says he has “never encountered” the one Groupon is using. “In essence Groupon is asking investors to look at their profit before any expenses,” says Mr. Strubel, who doesn’t plan to invest in the IPO and has no intention of shorting the stock. “It’s not a surprise they want investors to focus on measures that don’t include expenses since their expenses have been rising.”