Groupon shares benefit from LivingSocial's losses

Stock jumps nearly 19% after rival's losses revealed in filing

It continues to amaze me how stupid and sheep-like some investors are.

The latest case in point: Shares of daily-deals site Groupon (NASDAQ: GRPN) jumped nearly 13% on Thursday to 24.22 following's quarterly and annual earnings release late Tuesday. (Which comes after a 5.4% gain in Groupon share price Wednesday.)

That's Groupon's highest stock price since last December 16, the day that social games maker Zynga went public. Which in itself is dumb because Zynga has absolutely nothing to do with Groupon! One company copy-cats video games for get-a-lifers, while the other entices people to buy stuff they don't really need from merchants who lose money on everyone who walks through their doors with a Groupon coupon. See, there's no crossover.

But owns 31% of LivingSocial, hence its inclusion in Amazon's annual financial statements. And what did we learn about the No. 2 online discount site?

First, it doesn't generate as much revenue as Groupon -- $245 million in net revenue for all of last year (excluding sales from companies recently purchased by LivingSocial), versus about $1.1 billion for Groupon in just the first nine months of 2011.

OK, we already knew LivingSocial was behind Groupon, but that's a wide disparity.

The filing also revealed that LivingSocial is bleeding red, posting a net loss of $558 million last year alone.

Now, as the Wall Street Journal points out:

Ironically, Groupon looks a relative bargain next to LivingSocial. The latter was valued at between $4 billion and $5 billion when it raised new capital in December. Groupon, meanwhile, is currently valued at around $14 billion. LivingSocial boasts about 60 million world-wide email subscribers to Groupon's 150 million. But, assuming Groupon reports about $1.6 billion of net revenue for the year, LivingSocial is valued at 18 times sales, compared with Groupon at nine times.

Let's stipulate that Groupon is a "relative bargain" compared to LivingSocial. The key word there is "relative." The thing is, people, Groupon also is losing a ton of money -- $308 million in the first nine months of 2011. Why are investors scooping up shares of one money-losing company because a rival looks comparatively worse?

All of the reasons to avoid Groupon -- spelled out in detail here -- are still valid, despite the new information about its top competitor. Even Groupon's underwriters are underwhelmed by the company, with many initiating coverage with "neutral" or "hold" ratings. That's like a job reference telling a company asking why it should hire a prospective employee replying, "Whatever. It's up to you. I don't really have an opinion."

Groupon is scheduled to release quarterly results next Wednesday. Something tells me the investors jumping all over the stock in the past two days will have some buyer's remorse.

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