Why I'm Buying Groupon

Apr.18.12 | About: Groupon, Inc. (GRPN)

This week, in an attempt to refocus the legions of Groupon employees in a Google-like fashion, Groupon (NASDAQ:GRPN) management has introduced the company's new mantra, designed (like Google's (NASDAQ:GOOG)) to be Grouponer's moral compass going forward. After much internal debate among top executives, it appears that the simpler and more concise "Be Evil" has trumped "Don't Not Be Evil" as the new corporate mantra.

In other developments, it appears that Darth Vader is no longer being considered for the unfilled slot on Groupon's board after CEO Mason nixed the idea when a partial viewing of Star Wars Episode 6 left Mason concerned that "Vader may have lost his focus." OK, so maybe it's not really quite that bad, but it seems that everything I see, hear and read about Groupon these days is trying to convince me that Groupon is evil, that it is going bankrupt, that everyone hates Groupon, yada, yada, yada.

There has been a parade of bad news and daily articles taking Groupon management, its board of directors and anyone who publicly claims to use Groupons (without seeking a return more than 60 days later) to task. Is there anything negative about Groupon that hasn't already been said? It seems that Groupon has evolved into the Bizarro Priceline (NASDAQ:PCLN), with each day bringing more negative commentary, a new 52 week low on its stock and new analyst reports lowering the price target because it just traded below the old target low. GRPN has recorded a new 52 week low in each of the past four trading sessions and is now down over 50% from where it closed trading on its offering day, with Tuesday's new historical low of $12.25.

Given the negativity surrounding anything Groupon related, it's not as surprising that there were 23,338,658 shares sold short as of the settlement date of March 30. However, investors should note that GRPN was trading in the $18 - $19 per share range when that measure was taken. In the two weeks since that time, the stock has fallen another 30% on fairly heavy trading volume and an onslaught of negative articles and commentary.

Given the trading action since that time, it is quite likely that the next short interest report will show short interest has risen to the highest level in the company's short history, likely exceeding 25 million shares sold short, despite the fact that the stock is now trading 53% off the closing price on its IPO day. If there are over 25 million shares sold short, it would take close to three full weeks at current trading volumes (1.7m average last two days trading volume) with 100% of the transactions being buys to cover this short position.

Groupon management has clearly made some bad decisions along the way, particularly with how they chose to report their results to investors and the timing of some of those bad decisions. However, it appears that this is now fully baked into Groupon's valuation, possibly even a bit overdone. What will happen if the company issues some kind of positive news? What if GRPN's $8B market cap and 220% growth since their $6B offer entices Google to make a new offer?

What if the management team that created one of the most amazing business success stories in U.S. corporate history decides that the negativity surrounding the free fall in its stock price is starting to have a substantive impact on its day to day operations (less engagement with merchants as they start perceiving negativity, employees being less motivated etc.) and decides to focus its energies on turning that around? What if next month CEO Mason announces the company will reduce marketing expenditures in Q2, allowing investors to better see the earnings potential of the existing user base and thus offer significantly better expectations for Q2 than analysts have been predicting?

Even if none of these scenarios materialize, it still seems likely that there will be some point at which traders will recognize that the sentiment has gotten so ridiculously negative and there are so many selling short that any small shift in sentiment will allow for a double digit return almost overnight.

This is why I am buying Groupon. In the mean time, the "over the top" negativity, exploding short interest, oversold technical indicators and everything else suggests this is a pretty good short term trade that could turn out to be an opportunity to buy into one of the greatest growth stories in American corporate history at valuation metrics that are cheaper than what Google was willing to pay in late 2010 if Groupon management executes.

Disclosure: I am long GRPN.