Overstock - The February Of Reckoning

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About: Overstock.com, Inc. (OSTK)
by: Adam Stich
Summary

Two major catalysts could occur this month, February 2019.

WSJ reports that retail sale of Overstock expected to occur in February 2019.

GSR/tZero investment deal is set.

Either (or both) events could yield major upside to the equity.

The stakes have arguably never been higher for Overstock (OSTK), as February may shake out to be one of the most important months in the company's history. We could see a conclusion to two major catalyst events this month: First, the company is expected to announce a sale of the retail business; and second, the GSR investment in tZero is set to close at the end of the month. If one and or both of these events occur, the stock could see 100% gains to the upside in the near term.

Background on the bullish and bearish cases for Overstock - What Got us to this Point:

As of this writing, I remain firmly camped on the bullish side of Overstock. Yet, this is a contentious stock. Inasmuch, I recommend doing research on both the bullish and bearish arguments before making an investment.

To recap the bull case for Overstock, read my piece “Overstock - More Evidence for Bullish Evidence”. Also, I recommend listening to Quoth the Ravens’s July 2018 interview with Marc Cohodes. Marc outlines an Overstock long position as simply a free call option on Medici blockchain subsidiaries, the cash balance, and a sale of the retail business. The bulls tend to agree with this thesis.

For a Bearish argument on Overstock’s Blockchain ventures - particularly tZero - read Midwestern Hedgie’s article from Medium. While I contest to key points in Midwestern Hedgie’s article, I have great respect for Midwestern’s logic and articulation of the bear case. He is critical of Patrick Byrne - Overstock’s CEO - as well as elements of tZero’s marketing of security token investments. For another perspective on the bear argument, read Dan Victor’s SA piece on why he disagrees with Cohode’s $1 billion valuation for Overstock retail. Dan has a humble $200-$350 million price target for the retail division.

For a Twitter Overstock bear, check out @SamAntar. He seems a firm believed that Overstock is largely using tZero as a pump and dump:

Again, I highly recommend reading more of the background here if this is your first time looking at Overstock. If you’re familiar with the background and have a baseline investment thesis, then read on.

Why February 2019 is so Important to Overstock:

To summarize why February is such a crucial month for the company, I have outlined a brief timeline of key events related to the closing of tZero security tokens and the sale of the retail company.

Timeline:

  • Dec. 18, 2017 - Overstock announces a $250 million tZero security tokens offering with an expected closing date of May 2018.

  • Dec. 22, 2017 - Overstock CEO announces intent to sell retail division of company.

  • June 29, 2018 - Overstock's Blockchain Subsidiary tZERO Signs Letter of Intent with GSR Capital - a Chinese private equity firm - for Security Token Investment of $160 Million

  • Aug. 9, 2018 - GSR ups-the-ante and agrees to invest up to $404 million in tZero/Overstock. Overstock’s equity jumps 24% on the news. GSR signs a letter of intent to close the deal by year end.

  • Aug. 16, 2018 - Additional investors - other than GSR - were rumored to be in talks to invest in tZero.

  • Nov. 23, 2018 - The Wall Street Journal reports that Overstock will sell the retail division as soon as February 2019 to focus on blockchain ventures.

    • Quote from the WSJ article, “[Byrne]...expects to wrap up a deal by February."

  • Dec. 16, 2018 - Overstock announces a delay in the GSR/tZero investment.

    • Quote from the press release, "...we have granted GSR an extension, at its request, until February 28, 2019 to close the transaction."

  • Jan. 24, 2019 - tZero announces the commencement of trading on the platform by accredited investors.

Therein is an abridged saga that has led us to February, which could be a watershed month.

What Could February Bring for Overstock?

I foresee one of a few scenarios playing out over the next 10-20 days ahead; the top six scenarios are outlined below. The scenarios are listed in order of what I believe will have the greatest upwards movement on the equity. For instance, scenario 1 - I argue - could move the stock upwards of 200% from $20. Given that Overstock equity was trading at $46 in August 2018 (130% higher than today’s price), and the fundamentals weren’t as positive as scenario 1, a 200% move seems realistic in that case. Conversely, scenario 6 could result in a 50% decline in the stock from $20. Each scenario in between could result in a equity price move between that range.

  • Scenario 1: tZero closes the deal with GSR and Overstock sells retail in excess of $500 million.
  • Scenario 2: tZero closes the deal with GSR and Overstock sells retail in around $300 million.
  • Scenario 3: tZero closes the deal with GSR and Overstock delays the sale of the retail.
  • Scenario 4: tZero and GSR deal falls through and Overstock sells retail in excess of $500 million.
  • Scenario 5: tZero and GSR deal falls through and Overstock sells retail around $300 million.
  • Scenario 6: tZero and GSR deal falls through and Overstock delays and or drops the sale of retail.

Of course, I would like to see scenario 1 play out in February 2019, as I am net long the stock. However, I am conservatively predicting that scenario 3 will occur, in order to hedge my own expectations. Also, I am considering placing an order for a small hedge to the downside on the March 15 expiration put options with a $12.5 strike to protect some of my gains.

All in all, I am optimistic about this month. I listened to the investor call back in December when GSR delayed the tZero investment. On the call, Byrne was cautious yet upbeat about the deal going through in February. He said he had a nice conversation with GSR Chairman and Founder, Sonny Wu, and Wu assured Byrne that it would close. Byrne definitely footnoted that comment by alluding to the reality that there are no guarantees, and he plans to proceed with tZero regardless of GSR’s investment. Considering Byrne’s Bitcoin Conference North American keynote about tZero, I for one am pleased that he remains focused on moving forward.

In the speech he outlines that potential market for tZero and blockchain security token exchanges. Byrne shows that the total market cap for worldwide exchanges equates to .18% of the total value of the assets in those exchanges. Combining the bond, equity and real estate markets nets a cool $508 trillion market, .18% of which equals $914.4 billion.

(Slide from keynote presentation)

Assuming assets of the future are tokenized, I am not naive enough to argue that tZero would be a majority winner of the marketshare. Indeed, even if tZero merely captures a single digit fraction of the total token security exchange market that would given Overstock a valuation 3-10x today’s current price of $20. Moreover, it seems as though they have a first mover advantage. The slide below shows where tZero stands compared to competitors in regulatory clearance for a blockchain security token trading system:

Byrne is obviously bias in his optimism for tZero’s first mover advantage. I was, however, happy to come across tZero and Medici while recently reading the book Blockchain Revolution, by Don and Alex Tapscott. On page 83 of the paperback copy, the authors herald first moved achievements of tZero and Medici, stating that they were the first to issue a tokenized security. TZero is, moreover, mentioned throughout the book as having a head start in building an SEC approved security token trading platform. Those that criticize Bryne’s press releases as a pump and dump should read up on blockchain technology and history, of which Overstock and tZero have a solid place therein.

Conclusion:

I am an unapologetic believer in what tZero is trying to accomplish, and I believe the company will ultimately succeed is taking some of the security token markets of the future. The near term, however, is unknowable, which makes February unknowable. Overstock pushed back their security token roadshow several times before announcing the deal with GSR. Afterward, the GSR deal was delayed, which put into question the announcement to begin with. Given that the GSR update and a potential sale or retail could occur in the same month, I believe one of the two likely will take place. Either one should yield major upside in the stock. Who knows, maybe both will. We shall find out soon enough.

Disclosure: I am/we are long 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.