Last month I wrote an article suggesting that investors should consider buying Groupon (NASDAQ: GRPN) shares because there will be some point at which traders will recognize that the sentiment has gotten so ridiculously negative and there are so many short sellers crowding the trade that any small shift in sentiment will allow for a double digit return almost overnight.
Since that time, the negativity has only increased as there have been at least five new 52 week lows (including yesterday at $9.82) to add to the five or six new lows we had in the days leading up to the previous article. The only substantive news since that time has been the hiring of two new accounting oriented board members and two high profile management additions to help the company manage its remarkable growth.
What seems to have an even bigger impact on Groupon's stock than any substantive news is the constant drumbeat of negative commentary, most of which continues to harp on the same issues that caused the stock to start selling off back when it was trading north of $20 per share, along with a good dose of the "Groupon is evil" and "Groupon is going bankrupt" garbage. The volume and increasing fervor with which this negativity is being perpetuated leads me to believe that there are some who may have actually crossed a line between 1) a healthy distrust for the reported numbers of a company that has achieved such unprecedented growth and 2) a contempt, antipathy and what seems to border on some kind of irrational fear of Groupon. For the sake of brevity, I will call the latter "Groupophobes".
It appears that these Groupophobes will continue to inundate us with negativity in hopes of beating Groupon's stock down even further. I believe that if you take a closer look at two of the most oft repeated Groupon "evils", those usually peppered with such phrases as fraudulent, misleading, bankrupt, etc., you may find that Groupon is not as evil as the Groupophobes would have us believe.
1 - The SEC mandated accounting change before the IPO - Usually given as an example of Groupon management's "fraudulent" or "misleading" accounting, this most often includes a discussion of the SEC required adjustment in how Groupon reported its revenue leading up to the IPO. Before the required adjustment, Groupon was reporting gross billings (the amount it collects from consumers when they purchase goods and services) as revenue. There is nothing evil about that, it's the same thing that Priceline (PCLN) does with its opaque hotels offering where it acts as the merchant of record and nobody has ever suggested that Priceline is evil for doing it.
While I will not use this space to argue against the SEC's determination that the company should report revenue as gross billings net of the amount paid to the merchants, I think it's ridiculous to suggest that Groupon management was trying to mislead or "be evil" like the Groupophobes would have us believe, given that the most relevant determinant in which approach is proper is the question of who is the "primary obligor" in the transaction. This can be measured by determining the party the customer will look to for ensuring its satisfaction, which is best measured by who bears the majority of the risk in the transaction.
Arguably, the "Groupon Promise" puts Groupon (in certain scenarios) at risk up to the full amount of the transaction (see point #2 below for the impact that can have) and it is often the party consumers will hold responsible for ensuring their satisfaction. Thus, while we can argue about the SEC's determination that Groupon should report net vs. gross, it is ridiculous to suggest that Groupon management was trying to mislead investors when they reported using the Priceline approach, particularly when the Groupon promise makes them much more of the primary obligor than Priceline is in its transactions.
2 - Restatement of Q4 Results - Your average Groupophobe would like you to believe that Groupon management intentionally tried to mislead investors as to their earnings in the fourth quarter of 2011 and that they got caught by the auditors so they had to restate their reported results. I have to disagree. This is just a really good example of the kinds of surprises that occur when a company that is growing as rapidly as Groupon tries something new - which in this case was the introduction of higher priced luxury goods in the lead up to the Christmas shopping season.
While we can all agree in hindsight that the company should have adjusted their allowances for the possibility of a different level of returns, do we really believe that Groupon management was trying to sneak this one past us? Or are we all guilty of thinking that anyone who can grow a company from 120 employees and $14m in revenue to 10,400 employees and $1.6B in revenue in three years must have a crystal ball that allows them to see the future better than the rest of us and this should have allowed them to see that a larger percentage of customers would return higher priced daily deals than what the "historical" averages would suggest.
Keep in mind also that the "historical" requires us to hark back to the early daily deals era - (maybe even as far back as 2009) to crunch numbers from smaller deal transactions and somehow extrapolate that to determine what would happen with higher priced goods/services. In hindsight, it's obvious that the company's historical allowances for returns were insufficient because they were based on the lower priced goods and services we might usually associate with "traditional" daily deal offerings. However, the "obvious in hindsight insufficiency" should not be construed as an attempt to mislead and the company has obviously taken steps since that time to put greater controls in place to catch such errors in the future.
These are just two great examples of how the phenomenon of Groupophobia can distort things in such a way that investors might not see clearly the potential that still lies within the Groupon franchise. While it's still early to assume that Groupon will continue its meteoric growth and become the force in local commerce that leads many of us to consider investing in Groupon in the first place, those looking to profit from Groupon stock should give serious consideration to the near term potential for a rebound in the shares.
I believe the next week or so will cause investors and even traders to be a little more open minded about the Groupon trade and we might even get a reprieve from the "Groupon is evil" dogma that we have been inundated with the last few months. A quick survey of traders whose opinion I value indicates that some who were short are now covering and others who would have just recently argued for aggressively selling Groupon short now reveals a slightly more open-minded "No, I am not long Groupon...not that there is anything wrong with that". This is progress and as we start to look ahead to the next week or so, I think you will see more and more Groupon longs come out of the closet. No more hiding away from the dogmatic rhetoric and denying what we know to be a great growth story, (albeit one with the inevitable bumps in the road).
Maybe even some of those Groupophobes will confirm what we already suspect - that many of them now want to be long Groupon too, they are just afraid that they will be chastised by their peers for taking such a stand. While they may not have the guts to take a true long position, I believe that many will at least "box" those short positions over the next couple of weeks. Other Groupon longs who might come out include all the fence sitters who quietly have appreciated the Groupon growth story, but were afraid to try and catch the falling knife and traders who perceived Groupon to be a poor investment at $20+ but now get to invest at a valuation similar to what Google (GOOG) was willing to pay when the company was about one third its current size.
Additionally, I think investors/traders on both sides of the table (longs and shorts) will have to give serious consideration to several factors that may impact the stock over the next seven or eight trading sessions:
1) On Wednesday the Nasdaq short interest will be released and I expect that we will continue to see an enormous short interest in Groupon shares, one that would take weeks of "buy to cover" transactions at the normal trading volume levels to cover entirely. Given the timing of #2 and #3 below, I would be surprised if we do not see major short covering or at least the boxing of short positions until these potentially explosive events are in the past.
2) Groupon reports earnings next Monday - Do we really think that Groupon is going to miss the revenue or earnings projection for Q1, the projections that they made on the last day of the quarter when they disclosed the accounting issue that has knocked nearly 50% of their market cap? I am betting that they will exceed those numbers and maybe even increase their projections for the remainder of the year. Also, I will be very surprised if we do not see other significant positive news in the release or on the earnings call Monday. Even the most hardened Groupophobes will likely consider covering or boxing at least some part of their position going into Monday's earnings call.
3) The Facebook (FB) IPO is currently expected to price next Thursday the 17th. No conspiracy theory here, but doesn't it seem likely that many of the big banks that brought Groupon to market who are also participating in the Facebook offering would have an incentive to see Groupon shares rally from their current record lows? Trying to place what is arguably the biggest tech IPO in US history would be less challenging if the most recent significant tech offering from just six months ago is showing signs of life vs. hitting new 52 week lows each day. Not saying that Goldman, Morgan Stanley, et al.'s trading desks or retail brokers will be pushing Groupon over the next week or so, just saying that I would be surprised if we don't see some money flowing into Groupon over the next week and a half leading up to the Facebook IPO.
In summary, it seems that investors/traders who are looking to trade Groupon on either side might want to start considering some of the Groupophobes' negative commentary in its proper context. Many of them are likely short Groupon stock and there are so many shares sold short now that it will be difficult for them all to cover their positions before the events mentioned above without causing a significant increase in the stock price.
Given the number of traders watching the Groupon story and the propensity for them to "pile on" when the momentum shifts in either direction, the likelihood of positive news coming on Monday and the powerful hype machine for tech and social media names that will be running at levels heretofore unseen for the Facebook IPO, it seems that the money to be made with the Groupon trade is on the long side for the near term, regardless of what you believe about Groupon's future.
So if you run across some of those Groupophobes over the next few days and they seem a little testy, don't hate, just hug them. Isn't it time we gave the Groupophobes a little squeeze?