Sometimes technology stocks have some sort of weird Physics Laws behind them. Oftentimes when you see a stock soar, it becomes less and less attractive. When it crashes on the other hand, it becomes more appealing. How does this work? Keep in mind that a stock’s intrinsic value is the ratio between the price the market is paying for that particular stock and how much the company behind that stock earns. If a stock’s price is relatively low and its earning is quite high, then this ratio gets smaller and smaller. Now if the earnings are relatively healthy but the stock price is so high, then this ratio gets really big. This price earnings ratio (P/E) is one of the benchmarks used by investment professionals in assessing which stocks to buy and which stocks to sell short.
Groupon, the social network friendly group buying and advertising company, has been getting rocked ever since it debut at $20 a share. Despite of much hype and market excitement, the stock has sunk to $8.44 as of July 6. If you bought Groupon at $20, you are probably kicking yourself right now. The truth of the matter is you bought too early. The company has many detractors. Many digital inks have been spilled on the “fact” that Groupon’s business model is easily reversed engineered, its market is too fickle and its long-term value as an advertising medium for smaller companies. Indeed, there have been many stories of small businesses complaining about the type of customers attracted by Groupon deals. Be that as it may, the company’s earnings are actually growing at a healthy clip. It may look like that Groupon’s story illustrates that weird pattern described above where the lower the price of a stock, the more attractive it is because its price per revenue ratio right now is 2. That is a nice ratio.
Basically the value of its stock is twice its revenue. If this stock was not named Groupon and if it was not dragged through all that drama and tight scrutiny and negative investment industry feedback earlier, this would be a definite buy. Indeed, some investment industry observers are saying that the stock is beginning to look quite attractive right now. Of course, we are not at all suggesting that you should or should not buy the stock. You should look at the stock in holistic terms. Look at how the market as a whole is performing and what the trends are looking like because you would not want to catch a falling knife. Groupon may or may not have more space to drop, but at around $8 per share, it is looking quite attractive at this point.