Overstock to Bottom Out

CEO speak generates media attention. When Patrick M Byrne, CEO of Overstock.com (OSTK) speaks, the market and media give a little more attention (the reader can verify this argument by looking at the number of blogs posted about Byrne in Seeking Alpha). Byrne appeared on CNBC's Closing Bell on Friday, December 7. His comments on this show and a subsequent press release stating expectations about OSTK's performance in Q4 resulted in the stock tanking 21% on Monday, December 10. The stock has now lost almost 50% of its value from the October high of $39. Our belief is that the stock has tanked too much, and will bottom out soon.

Overstock has been showing signs of recovery through the past one year, after a substantial meltdown from the 2004 high of $77. This recovery was aided by expectations about the company making a profit. Its Q3 results beat the analyst expectations in both the top-line and the bottom-line (Loss of 20c per share on revenue of $161.9M Vs a consensus of a loss of 39c per share on revenue of $155.1M). The company reported an 81% YOY reduction in net loss to $4.7M, while improving its gross margins to 17.5% from 13.6% in the comparable quarter of the past year. For the first time, the company also generated a positive EBITDA for a non-fourth quarter. With the market expecting the company to make a profit in the fourth quarter, the stock rallied to $39.

Byrne has commented that OSTK will be expanding to Canada and a few countries in Europe. Positive signal, should the company generate profits. The recent cues from the company indicate otherwise. The press release indicated that OSTK's gross margins for Q4 would be lesser than what the company had seen in recent quarters. Nevertheless, the company has said that its gross bookings for Q4 (till Dec 10) has increased 10% YOY due to an increase in the average transaction size. The expected dip in the margins has been attributed to sales promotions and discounting. Inference - We will have to wait for one more quarter before the company reports a profit.

The online retail spending is improving, alleviating concerns of a dull holiday spending. On December 11, comScore came out with an update stating that e-commerce spending (retail spending excluding auctions and large corporate purchases) between November 1 and December 9 witnessed an 18% YOY gain. comScore also forecasts a 20% YOY gain in retail spending through the holiday season. OSTK, as a discount retailer, should benefit from this expected gain. The stock could find a bottom at around $15 levels.

Disclosure: none

Comments

[Airicon:]

haha, bottomed out huh? It's down more than 20% since you wrote this!

2008 Jan 04 09:56 AM