Groupon Inc (GRPN)’s Stock Could Double in 2013

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Groupon Needs a Positive Network Effect like Linkedin Corporation (NYSE:LNKD) & Zynga Inc (NASDAQ:ZNGA)

The professional networking and job search site LinkedIn was first to test the public’s appetite for social stocks when it went public in May 2011. Its shares have more than doubled since then. For LinkedIn, the company remains one of the few social media plays that have trended upwards in light of meeting earnings expectations and often surprising to the upside. LinkedIn’s success lies in its dexterity to drive the network effect among users.

Network effect means that the more people using a particular product (the social media websites in this case), the higher the demand is for that product (until the stable equilibrium is reached). For social media companies, revenue growth is directly correlated with the user’s growth. This is because more users translate to more opportunities to sell, which in turn will attract more advertisers.

Social media companies are unique in that the network effects heavily impacts the growth. By successfully incorporating the network effect in its business, LinkedIn has become a unique business model, despite fierce competition. LinkedIn’s emergence decreased the chance of social media giant Facebook dominating in the professional networking market.

Another social media site, Zynga, was founded on the idea that social media users are spending a lot of time on these websites, but after you make friends and exchange some photos, there’s not much else to do. So Zynga monetizes users by giving them games to play, and things to buy while they are playing those games.

Games don’t necessarily have long shelf lives. Zynga has reduced the impact of this by constantly pushing new content to consumers for in-game purchases. Zynga continues to release a steady flow of gaming apps. It is also beginning to break out of its reliance on Facebook as it attempts to diversify its revenues.

Like Zynga offering things to buy for its users, Groupon also can offer games to customers while using the site. Initiatives like this will not only generate ad revenue but also help to have a positive network effect on customers.

The Bottom Line

Groupon’s board was recently thinking of firing CEO Andrew Mason and looking for a replacement, Bloomberg reported. Firing Andrew Mason would probably be a positive catalyst for the stock, because it means the board is looking ahead in monetizing its customers by having a positive network effect.

Worldwide growth rates for social network users are expected to be 16.0% for 2013 and 11.6% for 2014, eMarkerter.com reported. Worldwide mobile data traffic will increase 13-fold over the next four years, according to another research report. This implies social networking sites that make engagement on the go easy will prosper. I feel Groupon is going in the right direction and Groupon’s stock will continue to outperform the NASDAQ in 2013.

The article This Social Media Stock Could Double in 2013 originally appeared on Fool.com and is written by Anindya Batabyal.

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