Overstock.com: A Dumpster Fire Waiting To Happen

Dave Kranzler profile picture
Dave Kranzler
3.93K Followers

Summary

  • OSTK's association with cryptocurrencies caused a temporary spike in price.
  • The Company's operations are a cash furnace.
  • The stock is extremely overvalued based on fundamentals.

Overstock.com stock price has run from $15.95 on August 2nd this year to a 12-year high of $65.70. If closed Monday this week at $46.10. The incredulous run-up in OSTK was ignited when OSTK decided to grab onto the coattails of the cryptocurrency mania. The company announced on August 8th that it would begin to allow shoppers to pay with Bitcoin and other cryptos. Then in October, OSTK announced that its tZero subsidiary would, along with two JV partners, launch an alternative trading system for ICO-issued crypto-coins. The announcement further fueled OSTK's remarkable stock move since August.

While it's too early to know if OSTK's crypto stunt will generate any degree of financial success, its e-commerce business is eroding. From 2013 to 2016, OSTK's net income plunged from $84 million to $12.5 million. For the company's first 9 months of 2017, OSTK has generated a net loss of $14 million (10-Q).

OSTK reported its Q3 on November 8th, after the close. Its headline numbers "beat" the Street, which I believe triggered a short-squeeze blow-off top from the November 8th close of $40.10 to a 12-year high of $65.70 on Monday, November 27th. The stock closed that Monday at $58. It fell the next four days to close last Friday at $42.30, a 35.6% plunge from the high-tick just five trading days earlier.

Turning to the details of OSTK's Q3 from its 10-Q filing, the company's revenues dropped year over year in Q3 from $441 million to $424 million, a decline if nearly 4%. Its operating loss for Q3 more than doubled from $5 million last year to $11.8 million this year. The operating loss surged because OSTK was compelled to spend heavily on advertising and promotional activities in order to generate sales.

Per the Statement of Cash Flows, the company's operations burned $62.5 million in the first nine months of 2017 vs. burning $15 million in 2016. I thought perhaps a significant amount of cash might have been invested in inventory ahead of the holiday season, but its inventory level declined 13% from the end of June to end of September. Typically retailers fatten-up their inventory ahead of the crucial holiday season. This is especially important since "Black Friday" sales now seem to begin in late October.

It would appear to me that the ICO private placement offering, due to take place sometime between November 15th and December 31st, is a gimmick to raise cash without doing a share offering. This is because, at the current cash burn rate, OSTK will need to raise cash by the end of 2018 if not sooner, especially if this year's holiday spending season disappoints expectations.

By any financial measure, OSTK is unbelievably overvalued. With a $1.33 billion market cap, it trades at 8x book value. That is the only financial metric that is measurable because OSTK, on a trailing twelve month basis, does not generate positive EBITDA, operating income or net income. To make matters worse, CEO Patrick Byrne announced along with earnings that he was "exploring" selling the e-commerce business or possibly combining e-commerce with brick/mortar retailing. To me, this is an implicit acknowledgment that OSTK's retailing model is beginning to perish.

CEO Patrick Byrne, in my opinion, is an extraordinary hype-artist and has managed to somewhat "connect" OSTK stock with the cryptocurrency mania. Make no mistake, associating OSTK's online sales platform with cryptos will not generate sales or profits. The company has burned more than 50% of its cash since the end of 2016, as its cash balance has plummeted from $183 million to $92 million.

For the reasons described above, OSTK is a great short/put option play. This was a $14 dollar at the beginning of August. Absent any fundamental catalysts to have supported the move up to $65, I see no reason why this stock will not be back at $14 by next August, if not sooner.

This article was written by

Dave Kranzler profile picture
3.93K Followers
I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for a large bank. I have an MBA from the University of Chicago, with a concentration in accounting and finance. Currently I co-manage a precious metals and mining stock investment fund in Denver. My goal is to help people understand and analyze what is really going on in our financial system and economy.

Disclosure: I am/we are short OSTK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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