October 5, 2012
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of coupon dealer Groupon (Nasdaq: GRPN ) rose as much as 12% today, finishing the day with a 9% gain in a volatile session of trading for social media stocks.
So what: There was no major news about Groupon, but fellow social media stinker Zynga (Nasdaq: ZNGA ) dropped 12%, after the online gamer cut its 2012 forecast and projected a Q3 loss. Notably, both Groupon, which opened flat, and Zynga rose considerably over the course of the day, as the Farmville-maker gained more than 10% after opening at $2.21. Both of these stocks are down more than 70% from their IPO prices and may have reached a bottom for now in the minds of investors. Though the two are struggling to be profitable, they now trade at P/S ratios below 2, meaning the wild growth the market had expected when they made their debuts has essentially been priced out.
Now what: Groupon is one of the most volatile stocks on the market, so investors shouldn’t read too much into today’s gain. This is the fourth time in a month that the stock has moved by 10% or more, as it’s moved to compete with Open Table and announced an initiative into mobile payments in the past few weeks. Those decisions could ultimately deliver; but for now, these social stocks seem only to have proven that the value of what's possible is often overvalued. Investors are better off waiting until Groupon proves its financial worth on the bottom line before getting on board.
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