Selling Overstock.com Ahead of Earnings

Overstock.com (OSTK) is scheduled to report third quarter 2008 results before the market opens tomorrow, Friday, October 24.

Based on our analysis, we at eChristianInvesting are expecting OSTK to report disappointing results that miss Wall Street’s consensus expectations.

Analyst Expectations

We are forecasting revenues of $185 million and EPS of ($.43). This would represent a 14% increase in revenues from last year’s $162 million in the same period. The current analyst consensus calls for revenues of $189.5 million and ($.26) EPS. The company has issued no guidance. We believe the current economic environment will be challenging for e-Commerce, especially for business models tied to discretionary consumer spending.

1. The current macroeconomic climate is proving difficult for most retailers. Both eBay and Amazon lowered their guidance forecasts citing difficult economic conditions.
2. Overstock.com has failed to establish itself with customers and website traffic seems to have flattened out.
3. Overstock continues to be unprofitable and with consumers cutting back on their discretionary spending, we don’t see the company attaining profitability in the foreseeable future.

In fact, we now believe that it will be difficult for Overstock.com to survive this economic recession in its current form. The majority of the value in its share price seems to be based upon a potential takeover by a larger, better funded rival (e.g. eBay (EBAY), Amazon (AMZN)).

Share Performance

To date, Overstock’s shares are down 30%. However, the real story is the 50% drop in their shares over the last month in a half.

Valuation

Shares are now trading at 0.2x consensus 2009 revenue estimates. Our belief is that these estimates will probably continue to be revised downwards in the coming months to better incorporate the macro concerns facing online retailers.

We see very limited upside in the near term for OSTK and believe that the company will struggle to even survive the current economic downturn. Therefore, we only recommend these shares as a speculative play on the potential of a possible takeover.

Recommendation

Sell.

Disclosure: none

Comments

[Hedged In:]

But the conference call will be fantastic, because it always is...

2008 Oct 23 06:41 AM