Overstock.com's Jedi Mind Tricks: Like Amazon in the Nineties

 |  Includes: AMZN, OSTK
by: The Stock Masters

The Stock Masters submit: When it comes to online shopping, Overstock.com (NASDAQ:OSTK) is among the top ten retailers. Their "closeout" retail store methodology and low shipping costs have established them as the premiere retailer on the internet, comparable only to Amazon.com (NASDAQ:AMZN). Their television commercials appear to make shopping at "The O" a glamorous, elegant experience. From the outside looking in, one would think Overstock.com is a successful and growing business, but looks aren't everything.

Overstock.com has had more press this year related to naked short selling and CEO Patrick Byrne's behavior then the actual status and development of the company itself.

According to Overstock's website the company has sold 19 million shares to the public but the open market consists of 35 to 40 million shares. There are 20 million shares unaccounted for and making current shares worth only half of their value. Needless to say, Patrick Byrne is very upset about the current value of his company's shares and he's not afraid to let the world know

One of my favorite comments made by Byrne was his statement that he was working to uncover a "Sith Lord" seeking to ruin his company. Patrick Byrne is not afraid to speak his mind, no matter how the press interprets him and it's unfortunate that his words have been turned against him. However, during press conferences it's probably best to avoid phrases like "coke head" and "I was gay" unless you want to sit back and watch the press declare open season and watch helplessly as calamity ensues. In this day in age where a scream can cost you the Presidential Primary (a'la Howard Dean), I admire Patrick Byrne's moxie; the man has charisma and determination to spare.

But Sith Lords aside, Overstock's share price in the past year has done nothing but move down, and it appears that the Dark Side is winning. Short selling drama and not meeting Wall Street's expectations have been brutal to this stock. The result: more than a 50 percent drop in share value within 12 months, as the chart clearly shows.

ostk 1-yr

More recently, Overstock's Q2 06 loss came in at $15.7 million primarily due to technology and infrastructure investments. Revenue rose 6 percent to $160 million, below Wall Street's expectation of $166.7 million.

The real question is when will Overstock.com turn a profit?

Overstock's position mirrors where Amazon was a few years ago when shopping on the web seemed like a great idea, but the online retailers, specifically Amazon, were operating in the red. Overstock has a P/E of -6.9 and it's difficult to predict when the P/E will be positive. Revenue for 2005 came in at a respectable $803 million, below Wall Streets expectations and no where near Amazon's 2005 $8.5 billion in revenue. Nevertheless, they are gaining market share.

In a press release this week, Byrne stated that he's willing to consider making Overstock.com a private company by instigating a management buyout worth over $500 million dollars. He's had enough of fighting hedge funds, analysts, and short sellers. You can't blame him; it must be heartbreaking watching your company's share price cut in half.

I think Overstock.com will survive and recover, just like Amazon. But again, the entry point for investors is difficult to speculate until the smoke clears. The stock has been hovering in the $17 range which may look enticing, but after reviewing the financials and Wall Street's estimates, it's best to stand back.

Patrick Byrne should be admired for his dedication to his company and his fight against naked short selling and hedge fund manipulation. If he does prove to be victorious and the Securities Exchange Commission [SEC] agrees with him, expect Overstock.com's stock price to jump through the roof. All the bad press on Byrne will be forgotten and he'll be praised as a modern day defender of market reform. The news agencies that have enthusiastically maligned him will make an abrupt 'bout-face and praise him, analysts will upgrade the stock, and Byrne will have proved that the Force can indeed beat the Dark side if one is noble and pure of heart.

So if it does turn out that a Sith Lord is destroying Patrick Byrne's company, he should try some Jedi mind tricks during his next press conference:

Stormtrooper: "Patrick, when will Overstock.com become profitable?"
Patrick Byrne delivering a subtle wave of his hand: "Overstock.com will prevail and become profitable. These aren't the droids you're looking for."
Stormtrooper: "Yes, Overstock.com will prevail and these aren't the droids we've been looking for."
Patrick Byrne: "We can go about our business"
Stormtrooper: "You can go about your business."
Patrick Byrne: "Next question. Move along."
Stormtrooper: "Next question, move along…move along."


Article written by Frank Lara Jr. and Ted Gottsegen.