Why Groupon Shares Popped

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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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Fool contributor Jeremy Bowman holds no positions in the companies in this article. Motley Fool newsletter services have recommended buying shares of OpenTable. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days

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  • Report this Comment On October 05, 2012, at 7:00 PM, kmacattack wrote:

    I buy groupons almost every week now. They have unbelievable deals on great restaurants, travel, gift items and now are offering the lowest discount rate on credit card processing. they spent one heck of a lot of money setting up the company and it's world wide sales force., but their volume is growing by leaps and bounds, I know there are a lot of customers who LOVE Groupon and use the groupons regurlarly. I have 3 friends who own restaurants in this city of about 700,000, and all 3 use groupons to promote their businesses, which are all 20-50 years old and were doing fine before Groupon came along. Groupon has driven new customers to their businesses and the owners aren't paying for ANY advertising which doesn't produce a sale 100 percent of the time. Most newspaper ads will produce a sale to about 1 percent of subscribers. These business owners have promoted with Groupon several times over the last year and are all happy. To me, Groupons are a win-win for both the business and the customer. When the stock bottommed about 3 weeks ago, I bought 1k shares. The company is no longer bleeding cash and I believe is about to soar. Groupon reminds me of Sirius XM which I bought 3 years ago and it's nearly tripled since then. I think Groupon has an excellent chance of tripling in the next year. JMHO.

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Related Tickers

10/24/2016 10:43 AM
GRPN $5.14 Up +0.12 +2.39%
Groupon CAPS Rating: *
ZNGA $2.93 Up +0.05 +1.74%
Zynga CAPS Rating: *