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Groupon Inc: A Reminder to Focus on the Long Term

By Tim Brugger – Feb 26, 2014 at 1:30PM

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After getting clobbered following last week's earnings, the online deals leader is heading back toward a double-digit stock price.

What a week it's been for Groupon (GRPN -3.89%) and its shareholders. After posting solid 2013 Q4 and annual results on Feb. 20, shares of the online deals king nosedived nearly 20%. How does that happen, you ask? As discussed in a recent article, Groupon was the victim of what is becoming a widespread disease: missing analyst expectations.

Following Groupon's "disappointing" results, there were a slew of analyst downgrades and lowered price targets. Predictably, Groupon shareholders felt the brunt of the Street's bearish outlook, with its stock price dropping from its pre-earnings price-per-share of $10.28 to $8.03 the following trading day, and it eased even more to $7.78 a share 24 hours later. That kind of knee-jerk reaction was crazy enough, though it was a great buying opportunity for those with the gumption. But what's happened to Groupon's stock price since is even more baffling.

What gives?
Since the untimely sell-off of Groupon just a few days ago, its stock has since regained nearly half its losses, gaining 8% on Tuesday alone. Did Groupon's CEO Eric Lefkofsky announce some new, game-changing product or service that left investors cheering? Nothing as cut and dried as that, unfortunately.

By most accounts, Groupon's stock-price jump was in response to the positive earnings from a newcomer to the online-sales universe -- at least new in terms of being a publicly traded alternative -- called Zulily (NASDAQ: ZU). Zulily went public in November of last year at a price of $22 a share. The self-proclaimed daily deals site for "Moms, Babies, and Kids" blew analysts away after reporting its first quarterly earnings results a couple days ago.

Not only did Zulily generate a $0.05 a share profit this past quarter compared to a $0.71 a share loss the prior year, it beat the vaunted analyst estimates by a $0.01 a share. Zulily also made friends among the investment community by forecasting revenues in the current quarter between $225 million and $235 million, beating estimates of 222.9 million. The result, including the jump at the open on Wednesday, was a nearly 50% increase in Zulily's share price to around $60 a share.

The irony of Zulily
There are several factors that make Groupon's positive stock price movement, apparently based on Zulily's strong quarterly results, so ironic. When founder and former CEO Andrew Mason introduced Groupon Goods about two and a half years ago, he and Groupon were absolutely lambasted. Margins, the analysts screamed, were going to take a severe hit. Yes, they were, but it also opened a new line of revenue in addition to the highly competitive online deals business that made Groupon, well, Groupon.

While Groupon was beaten up after announcing earnings, in large part because of lower Q1 guidance due to costs associated with its recent acquisitions, lost in all the negativity was the news it generated nearly $600 million from its goods unit in Q4. Zulily? $257 million in net sales for the quarter.

Which brings us to irony number three: Zulily, after its explosive stock price run-up, is now approaching three times the market capitalization of Groupon, though Zulily's annual sales of $695.7 million were only about 15% more than the revenues Groupon generated from its goods business in Q4 alone.

Final Foolish thoughts
For most Foolish investors, certainly those of us who have been around a while, Groupon's rise and fall the last few days shouldn't be overly surprising. The short-term nature of most analysts' recommendations, let alone of many investors, gives rise to these types of inane stock price movements. But even though wild, short-term stock-price swings like Groupon are unavoidable in today's investment world, they'll only frustrate reactionary investors, not those who have done their homework.

Tim Brugger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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