Zynga Inc (ZNGA) and Groupon Inc (GRPN): Have the Bottoms Set In?

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Zynga Inc (NASDAQ:ZNGA) and Groupon Inc (NASDAQ:GRPN) both had initial public offerings within the past two years. Groupon debuted in November of 2011 by offering shares at a price of $20. Zynga Inc (NASDAQ:ZNGA) debuted in December of 2011 at $10 a share. The share prices of both companies cratered over the next 12 months. Within the last six months, both stocks have shown some life and have recovered to some extent. The question is whether a firm bottom has set in, and if there is opportunity for investors to pick up shares in the companies at affordable valuations.


Groupon Inc (NASDAQ:GRPN) proceeded to drop from its IPO price of $20 to a low of $2.60 in November of 2012, a decrease of about 87%. The price has since rebounded over the past 6 months. It is currently trading around $6.88, and is up over 68% in the past six months.  Check out the price chart here.

The Company’s numerous missteps through its IPO process and beyond have been well documented in the media. However, Groupon has gone through some major changes as of late, with the replacement of founder CEO Andrew Mason in late February. Groupon Inc (NASDAQ:GRPN) has major challenges facing it. For the first quarter of 2013, Groupon reported gross billings, which represents the dollar value of customer purchases of goods and services, rose 4% to $1.41 billion, compared with $1.35 billion in the same prior year quarter. While revenue increased 8% to $601.4 million, the Company reported a net loss of $.01 per share, or $4.0 million. The earnings were hampered by the poor performance of the international sector of the business.

Many observers believe that Groupon Inc (NASDAQ:GRPN)’s business model is flawed. One factor is the lack of barriers to entry for competitors. Once Groupon took off, a number of other companies entered the business, including Living Social and Amazon.com, Inc. (NASDAQ:AMZN). There is nothing preventing these competitors from overtaking Groupon’s customers. Living Social is also having issues obtaining profitability, which may be another indication that the daily e-mail deal model is not sustainable. Amazon.com, Inc. (NASDAQ:AMZN) made an investment of around $175 million in Living Social, but reported a loss of $169 million related to Living Social in the third quarter of 2012.

The daily deal e-mail model is proving to not be profitable enough. Groupon Inc (NASDAQ:GRPN) has undertaken a more generic strategy of offering goods for purchase on its site. Further, now that the initial hype has worn off, merchants are not finding that the coupon deals do not necessarily lead to long-term customers. As such, merchants are less likely to offer the deals again. The future for Groupon appears to be hazy at this point. The stock is highly shorted by the market, with the most recent short interest reported at over 27 million shares. Although the share price has rebounded slightly, Groupon Inc (NASDAQ:GRPN) has not proven that it will be able to operate profitably in the long term.

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