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Zynga (ZNGA), the maker of social media games on Facebook (FB) and mobile phone platforms, released its quarterly earnings July 25th and shocked investors with just a $0.01 profit after items, well short of the expected $0.05 profit. On news of that announcement, Facebook, the primary platform for Zynga's games, tumbled 6%. Groupon (GRPN) also lost 7% on the announcement, falling during early trading to $6.67. This brings up the following question: Why would an online discount voucher, retailer, and local e-commerce leader like Groupon go down sharply because a digital game maker saw disappointing results?

The answer? A witch hunt stock market that is trading on emotion and over-correlating results across industries. It's the epitome of a depressed market that often signals a bottom -- a nervous, jittery market that is taking out only loosely related companies with spurious business correlation.

Not that the market was treating Groupon based on its fundamentals before the earnings release by Zynga. When assessing the performance of the company since last November, which is down 73%, it appears reasonable to ask whether there is a more unloved stock in the United States markets than Groupon.

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The eccentricities of management have no doubt contributed to the shaky reputation of the company in the public markets. From what many considered to be an insensitive television advertisement during the Super Bowl that forced an apology from the CEO to its recent offer of home turndown service in its hometown of Chicago, Groupon has always been characterized as a non-traditional company willing to push boundaries.

Like many investors, I initially believed the negative assessments would send me steering wide and clear of Groupon. The news in April that accounting irregularities related to return-loss provisions would require adjustments and possible restatements made me even more cautious. For months since the announcement of return-loss provisions, the stock has continued a long and sustained slide from $18 to $7, with investors even shrugging off first-quarter results that far exceeded estimates.

Upon performing due diligence, the resulting low valuation and positive long-term fundamentals allow the negative bias to give way to a significant level of optimism and belief that this may be the most misunderstood company in the public markets.

Groupon is arguably the fastest growing company in U.S. history. The company, begun by CEO Andrew Mason and founder Lefskoky just five years ago in Chicago, has grown from $330 million to $1.6 billion in sales in just two years. The company has encountered growing pains as it has invested in the systems to support that growth and the very aggressive future growth projections of analysts, which anticipate the company growing to $3.07 billion in revenue in FY 2013.

The growing pains encountered by Groupon have called many to question the timing of the public offering. Certainly, the company may have benefit from additional seasoning prior to going public. However, companies going public are able to quickly build up a low-cost war chest that allows them to make significant investments in the business. That war chest remains on Groupon's balance sheet in the form of $1.16 billion of cash, which is 25% of the total market capitalization of the company. While Groupon has held off on major acquisitions, it has made eight small acquisitions that have enhanced its travel and customer information applications for mobile devices.

Groupon has positioned itself to be a technology leader for local retailers, those relatively small and powerless retailers that suffer high banking fees and that often don't have sufficient technology prowess or budgets to present an online presence. Groupon has significant competitive advantages. It has first-mover advantage, which allowed the company to build brand awareness that has resulted in strong subscriber growth to its daily deals service throughout its history. It is building on this customer base through its rapidly growing Groupon Goods retail application, which has limited duration offers of products at heavily discounted prices. Its relationship with small retailers in local markets will hold the key to its future success. In May, Groupon instituted Groupon Rewards, a program that rewards customers and merchants with an easy-to-use loyalty reward functionality.

Groupon is exceedingly cheap from a fundamental perspective. At just under $7 per share the company trades at just a $4.4 billion market capitalization, which is just $3.5 billion net of cash. Its forward price-to-earnings ratio is just 10.3, which is tremendously low for a company that grew trailing revenues over 500% during FY 2011 and which current analysts anticipate will grow revenues by 50% during FY 2012 alone. If the company simply meets analyst expectations for revenue growth during the current FY, the shares have 50% upside. Continuing to meet guidance and estimates through FY 2013 will provide 100% upside on the shares, even without expanding the price/sales or price/earnings metrics. However, the company executing on its projections would likely cause both increased investor confidence and a short squeeze that could lead to far higher pricing for the shares on an absolute and fundamental level.

Aug. 13th will prove to be a pivotal moment for Groupon. Due to the weakness in other Internet firm results, shares of Groupon do not have a catalyst until the next earnings report. However, that report will have the potential for explosive upside if Groupon meets its conservative revenue estimates of $550 million to $590 million for the quarter that were disseminated in its Q1 2012 conference call. The results for Q2 will allow the company to make good on its promises, and provide a large upside catalyst to the share price by validating current analyst estimates.

Source: Why Groupon Is Unfairly Linked To Zynga And Could Double Within A Year