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Nearly lost in last week's hubbub was a pessimistic report on Groupon, which had previously reassured investors with robust revenue growth. In downgrading Groupon to “equal weight,” analyst Ken Sena of Evercore Partners suggests Groupon’s top line isn’t as pretty as it seemed. (Scott Olson/2011 Getty Images)
Nearly lost in last week's hubbub was a pessimistic report on Groupon, which had previously reassured investors with robust revenue growth. In downgrading Groupon to “equal weight,” analyst Ken Sena of Evercore Partners suggests Groupon’s top line isn’t as pretty as it seemed. (Scott Olson/2011 Getty Images)

Deal or no deal? More Groupon revenue coming from sold goods Add to ...

The disappointing performance of Facebook Inc. and Zynga Inc. last week grabbed the social-media investing headlines.

Nearly lost in the hubbub was a pessimistic report on Groupon, which had previously reassured investors with robust revenue growth. In downgrading Groupon to “equal weight,” analyst Ken Sena of Evercore Partners suggests Groupon’s top line isn’t as pretty as it seemed.

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Mr. Sena says that while the company suggested its gains came from doing a better job of targeting consumers with its core business of deep-discount coupons, a major element of the recent quarter’s success came from its “Groupon Goods” business, and its different accounting methods for booking revenue.

Groupon Goods is the company’s consumer products category that offers physical goods rather than the traditional discounts on services from local merchants like restaurants and massage parlors.

Mr. Sena estimates that roughly 18 percentage points of Groupon’s 32 per cent quarter-to-quarter North America revenue growth was the result of expansion within the Goods category where Groupon was the merchant of record. When Groupon is the merchant of record, it takes on inventory risk by actually owning the goods to be sold.

And unlike in the traditional deals business, where Groupon can only book as revenue its small share of the deal price, Groupon can (and should) book 100 per cent of the sales price in Groupon Goods.

Mr. Sena’s concern is whether Groupon has been giving investors a good enough sense of the impact this has been making on the top line. CEO Andrew Mason said on the quarterly call that “technology,” “personalization initiatives” and “deal density” were responsible for the revenue gains, and did not cite Groupon Goods’ impact.

“…So the [revenue] performance we saw in North America was partly due to technology, but it was also due to increases in deal density that we saw through operational efforts,” Mr. Mason said, per an excerpt highlighted by Mr. Sena. “Proximity of deals is the number one driver of purchase behavior by customers. So by getting more dense deals, we were able to use our technology in order to provide better targeting to customers, give them deals that were more relevant to them, and thus deliver performance improvement.”

But Mr. Sena then took a peek in Groupon’s 10-Q quarterly report, in which it said the increase in the company’s cost of goods sold line was “primarily driven by the purchase price of consumer products” from the Groupon Goods business.

“It would reason that Goods’ impact on North America revenues was indeed meaningful,” Mr. Sena wrote, leading to one of his conclusions: “We seethe need for greater transparency.”

Groupon spokeswoman Julie Mossler declined to address the matter, saying in an email “we don’t comment on inquiries like this one.”

In cutting his target price from $17 to $9, Mr. Sena said he estimates Groupon North American billings to be “trending flat sequentially” compared to his prior 10 per cent quarter-over-quarter estimate. And he believes international billings are now flat to negative compared to his previous estimate of 7 per cent.

The shares hit an all-time low of $6.50 Friday, recovered to close at $7.50, but have retreated below $7 in midday trading Monday.

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