Is Groupon Getting Set Up For A Big Short Squeeze (Again)?

Jul.12.12 | About: Groupon, Inc. (GRPN)

Once again, it appears that short sellers are piling on in the lead up to Groupon's (GRPN) earnings report. It should be noted that this occurred leading up to the company's Q1 report as well and there was a tremendous short squeeze that started on the day of the company's quarterly release that continued driving the stock higher the following day. This two day squeeze allowed for a 50%+ gain in just two trading days as the stock traded as high as $14.93 per share.

After the close yesterday, Nasdaq's short interest report was released showing that Groupon's short interest has surged to the highest level in the company's history - with over 27 million shares sold short. This report was based on the short interest as of the close of trading on June 29. Groupon's stock has traded down over 30% since that June 29th report was released (it traded down to $7.24 just a few minutes ago) leading me to believe that the short interest is potentially much higher now.

While there have been many incidents (GRPN chairman Lefkofsky's "stepping back" blog post, negative analyst reports, etc.) that have likely contributed to the downward pressure on the stock, many outlets have pointed to the Comscore report showing that traffic to the Groupon sites was down 15% in June over the same period last year.

Could it be that such a decline in traffic is largely the result of the company spending less on pay per click advertising, which was the company's largest expenditure in the months (including June of last year) leading up to the company's IPO? During that period, the company was still in the mode where it was spending like a sailor to add new subscribers, to a degree that many commentators suggested the effort to be excessive.

As such, to report a month where traffic was down year over year vs. a period where the focus was growing the traffic and subscriber counts instead of operating profitably may not be indicative of anything other than that the company now has adjusted their aim to focus squarely on profitability and it is possible that the company is no longer spending wildly on pay per click advertising to keep those traffic counts up.

While this is not knowable until the company reports for the quarter, traders may want to consider the possibility and also what will likely occur if this proves to be correct and the company again reports revenue and earnings that are substantially stronger than current street estimates. Short squeeze part duex?

Disclosure: I am long GRPN.