What You Should Take Away From Groupon's Big Drop

| About: Groupon, Inc. (GRPN)

On November 22nd, a day when the S&P 500 dropped by 41 basis points, Groupon (NASDAQ:GRPN) shares dropped by a staggering 14.89 percent. Other "hot stocks" like Netflix (NASDAQ:NFLX), Green Mountain Coffee Roasters (NASDAQ:GMCR), Amazon (NASDAQ:AMZN), and Salesforce.com (NYSE:CRM) have also experienced large drops recently, but their drops came off of major announcements by the company, earnings disappointments, and severe downgrades by big financial minds. According to this Reuters article, the Groupon drop stemmed from concern about "increased competition". The article cites how Living Social announced on Monday that it plans to offer "more than 20 deals with national merchants" pertaining to Black Friday deals. However, Groupon opened AT A GAIN on Tuesday. In addition, it's been public knowledge for a long time that Groupon has plenty of competition. Google Offers and Living Social are the big names, and Credit and Debit card rewards programs will continue to expand and look more like deal websites.

I always find it odd when stocks take big single day plunges when there is no major news released to the public. However, if this is to happen to any company, Groupon is a good candidate. The stock is grossly overvalued by any valuation metric and other than a subscriber base, the company really has no long term competitive advantage.

In addition, the bears are finally gettting to have their say in what Groupon's stock price should be. As time passes, Groupon shares will be easier to short and the price will be brought down. There are also supply and demand issues. Very little of Groupon was actually floated and with other innovative dot coms going public soon like Zynga (ZYNG) and Facebook, there will be more of a stock "supply" of young, innovative companies out on the market. I for one like to stay away from any stock that is driven by supply and demand because in the end, value is what you get.

I believe that a lot of this year's tech IPOs will face big drops over the next year. Any failure to meet an analyst expectation or a departure by an early institutional investor can cause these stocks to take large short term hits that will add up over time. For example, Bain Capital's sell-off of Linkedin (NYSE:LNKD) sparked very bearish activity of the stock recently. More of these companies' stocks will continue to become available to the open market and eventually, the supply will outweigh the demand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.