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The Real Reason Groupon’s Stock Dropped

Shares of Groupon (GRPN) fell 15% in after-hours trading Wednesday after the company reported a surprise loss. But financial performance has little to do with the selloff.

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Groupon’s revenues soared 194% during the quarter, to $506.5 million. How many companies are growing like that? It lost two cents a share, adjusted for special items, whereas Wall Street was looking for a three-cent profit. But plenty of young companies pay up to fund their growth, dragging down earnings early on, and it’s hardly surprising that in its first quarter as a publicly traded company with analyst earnings forecasts, Groupon came up a little short.

It seems more likely that Groupon shares are falling simply because they’re expensive (see “At Half Off, Is Groupon a Buy?”).

“Glamour” stocks–a term researchers use for shares that trade at many times their sales, earnings, book value or other fundamental measure of value–bear a heavy burden come reporting time. When they beat estimates, prices rise only a little over the following year, and when they miss estimates shares get clobbered, according to long-term research by Brandes Investment Partners, a San Diego money manager. “Value” stocks, on the other hand, tend to jump during the year after beating earnings and, surprisingly, do pretty well even during the year following earnings misses.

In other words, the starting price matters at least as much as the financial performance. Not all cheap stocks do well and not all pricey ones disappoint, of course. But all else held equal, investors are best off paying modest valuations rather than rich ones.

Groupon had a good quarter. But even adjusting for the potential stock decline on Thursday, shares will trade at around eight times revenues. That’s more than five times the broad market’s price and the sort of valuation usually reserved for great growth stocks.  Apple (AAPL), for comparison, trades at 3.4 times revenues.

So investors who are considering scooping up Groupon shares on the dip should be cautious. The good news for devoted holders is that the shares had jumped from $20 and change to more than $25 in February, until the earnings report. So shares on Thursday might lose only what they recently gained.


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    • Few stocks are seen as super sexy stuff in times like these.

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