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Overstock: SEC Subpoena, Overvaluation, And Competition Create A Short Opportunity

Harrison Schwartz profile picture
Harrison Schwartz


  • The pandemic lockdowns caused a surge in online shopping for furniture and home furnishing items.
  • This surge, combined with skyrocketing cryptocurrencies, caused Overstock to rise by over 10X in both share-price and valuation.
  • Overall, Overstock's much-hyped cryptocurrency platform appears unlikely to materially improve Overstock's fundamentals and may even be causing managerial misdirection.
  • Given chronically low profit margins and declining Ecommerce market-share, it seems OSTK's 50X+ forward "P/E" is not justifiable.
  • The recent decline in OSTK may only be the beginning of a larger short opportunity.

Overstock.com (NASDAQ:OSTK) was on a tear during the first two months of 2021. The stock rose from under $50 per share to over $100 in a matter of weeks but has since reversed most of those gains. To make matters worse, the SEC subpoenaed the firm last Friday regarding previous guidance statements. This news caused the stock to lose about 5% of its value.

The rapid rise and fall of stocks are surprisingly common in today's financial market. Many stocks have risen dramatically over the past few months, though recently declined dramatically due to rising long-term interest rates and the longer-than-expected lockdown environment.

Initially, Overstock was a pandemic-winner. As consumers reduced out-of-home expenses, many flocked to purchase new rugs, furniture, and other items Overstock sells. Even more, fewer consumers were interested in shopping for such items in-store and opted for online platforms like Overstock. This was also beneficial for companies such as Wayfair (W). However, as you can see below, OSTK's performance has been much better than Wayfair's:

OSTK's performance has been nothing short of phenomenal. The company's value increased by over ten times during the pandemic's onset while its competitor rose only 2-3X - still a sizable return.

Overstock's History With the SEC

With such extreme gains, one can only expect some eyes at the SEC will turn. Overstock has a history of getting subpoenaed by the SEC. It was subpoenaed in October 2019 regarding a dividend payment and management stock trading. It was later subpoenaed regarding its investment in its private asset liquidity platform launch tZero which did not go according to plan.

The company's former CEO Patrick Bryne was also accused of securities fraud and using the token launch to artificially boost OSTK's value in a lawsuit. To make matters more interesting, Byrne also left

This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (28)

I agree with your analysis. Thanks
Overstock's stock price seems to rise and fall more with the price of Bitcoin than with the success of its retail business.
joezapp profile picture
@J Dubs Yes, due to the tZero kicker.
I agree.
SG29 profile picture
16 Mar. 2021
@J Dubs 3 years ago that was true, but now they are barely even correlated. OSTK has clearly risen in the past year on the strength of its retail business due to COVID-related tailwinds.
$73 at publication. $57 now. Nice call.
@BaconLR you could have thrown a dart and said short any one of the ndaq stocks and had a good call. This is a macro move. OSTK will do great long term IMHO
joezapp profile picture
@BaconLR Yes, but the Nasdaq went down 2000 points. Can't really say the "nice call" was stock specific. But it worked.
@BaconLR $77 today 3-19. Buy low sell hi
bazooooka profile picture
Seems like a dangerous short; the reddit crowd is well aware of this ones battles of the past. Valuation did seem excessive when this one ran to triple digits but I think it could level off sooner than later. Likely best to stay on sidelines for now.
SG29 profile picture
03 Mar. 2021
I was hoping to read a compelling bear case on OSTK, but what we have here is a confused misinformed OSTK bear who suggests shorting but won’t short it himself. Anyone who shorts OSTK after reading this article deserves to lose their money. With that said, I’d still be glad to read a coherent bear thesis on OSTK, but this ain’t it.
@SG29 Let me try as I view SA as a place to learn and discourse and to hone my thesis. I have gone through the pros and cons so have run through both a bull and bear case before. The bear case hinges on a dropoff the stay at home and nesting habits which lead to a huge increase in revenue for OSTK in 2020. As people go back to work office regardless of a hybrid work model or not and venture outside their home, they will buy less home goods. Additionally, there is only so much furniture and home goods one can buy and 2019 may have been a demand pull (from future years) environment. If revenues go down and operational leverage goes in reverse, then OSTK will be exposed as the sub optimal operator it has been (compared to W for ex) for the last 5+ years where it sold at a P/S ratio below 1 and could not make a profit. From a long term competitive perspective, it lacks the scale vs W, AMZN, WMT etc (gross and operating margins are lower) and it shows as OSTK has decided to market on the value segment of the home goods market as to not directly compete. The value play in any industry has rarely outperformed the market scaled leader and in such a case, it is better to buy W than OSTK if you want exposure in home goods and furniture.
joezapp profile picture
@parity Nice analysis! I'll throw in that it is anticipated that the customers that OSTK attracted in 2020 will stick. And tZero is in the picture as a kicker.
@joezapp Haha, that's no fair. We were supposed to do bear only. On the bull side, I agree that it is underappreciated (for W, ETSY, OSTK, PRTS, etc) fact that online attracted a bunch of new customers on their platforms and reinvigorated dormant customers. It was not just existing customers buying more. This is real long term value creation.
joezapp profile picture
You waited until a share price of 68 to discuss a short opportunity on OSTK? Where were you in mid-February?

And you spend a lot of time talking about Byrne. Byrne is long gone and no longer a factor.
The author is clueless let's save our saliva to educate him
DRE_3000 profile picture
(1) Market Share:

OSTK revenue is growing at a significantly faster clip than Wayfair, which would suggest OSTK is gaining market share, not the other way around.

74% OSTK vs 55% W YoY annual revenue growth or 84% vs 45% YoY quarterly revenue growth, according to the latest filings.

not sure whether your are aware Overstock announced partnership with venture capital firm Pelion Ventures to convert their "non-core" businesses - blockchain-focused subsidiary Medici Ventures (this includes tZero) - into a limited partnership.

Overstock will be a limited partner in the Fund, Pelion will act as the general partner of the Fund

this should remove any doubts around managerial misdirection as it allows Overstock leadership to focus on its core ecommerce business

02 Mar. 2021
Too dangerous to short this stock. And since even the author is not short, I wouldn't advise anyone to short it. Avoiding it is the best bet here.
Though there are many errors with this post, a few points that readers deserve clarity over:
1. The chart graphing the Furniture and Home Furnishings Stores shows the exact opposite of the bottom line claim "overall furniture/home furnishing shopping market is still slowing down over the long-term."
2. OSTK cash balance is ~$12-15 per share, which is completely neglected from the $25 share price calculated strictly on an unsubstantiated forward earnings multiple
3. The tZero platform's security token is $TZROP, it is not a cryptocurrency, nor is the ticker $TDZROP. The tZero platform currently controls over >90% of the security token industry which is significant market share for a "non-competitive fish"
The Stock Stooge profile picture
@jackcambell What is the security token industry?
I don't necessarily disagree with your negative stance on OSTK but I disagree with your reasons and assumptions. I disagree that OSTK's current valuation is a big beneficiary of crypto. It ran up bc of the stay at home ecommerce and stimulus trends in 2020. The crypto spike really happened in late 2020/2021 and OSTK had well hit its high before that. There was a FOMO spike around the GME times but that was short lived and OSTK has dropped back down while crypto was at ATH last week. The question for both OSTK and W is how they perform in difficult comparisons later this yr. The earnings estimate are a wide range and the avg assumes retracement from 2020. If they manage to stay flat or grow vs the last avg 2 qtrs of 2020, the valuation is no longer expensive. I am short term bullish on OSTK bc of the additional stimulus and would trim mid term bc of difficult compares.
@parity How can you say the valuation is no longer expensive is they stay flat over last 1 quarters of 2020? The growth prospects of this company do not merit 40-50x P/E
@jmguiliani I said avg 2 qtrs of 2020. According to SA, it would annualize EPS @ $2.06. Say a price of $70. That's about 35x. If company was able to stabilize in '21 at that or grow, then that would mean long term growth for next 3-5 yrs would likely be 15%+ CAGR sales. EBITDA and EPS will likely grow faster than revenue so 35x would not be bad even in a less toppy market. In this market, that would be comparatively cheap. The big Q is if they can stabilize revenue.
tedonthego profile picture
Hope SEC gets Patrick Byrne for insider trading. The man almost drove OSTK over the cliff and yet profited very handsomely with his stock trades. The "Humble Servant" should go to jail. How OSTK Board put up with him is a mystery.
Talk rubbish
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