If you want to invest in blockchain technologies, by all means, feel free. Just don’t do it through Overstock.com Inc (NASDAQ:OSTK) and OSTK stock.
Here’s why I say this:
My wife and I are relocating to Halifax, Nova Scotia in February. Over the holidays, we visited our new hometown to find a place to live. While dropping by a friend’s home, their university-aged son started asking me about Bitcoin, the blockchain, cryptocurrencies, and every other hot investment out there today.
I told him I don’t doubt that blockchain technologies are for real. My belief is — not from some specific expertise I might have but rather a common-sense understanding — that anything that makes transactions between interested parties safer and more secure –is worth pursuing.
My second piece of advice, if you could call it that, was to check out Howard Lindzon’s blog, Investing for Profit and Joy. I get his daily blog post and find his writing to be a refreshing blend of business and pleasure. He is, in my opinion — although I’ve never met him — a real mensch.
He not only understands blockchain but also invests in cryptocurrencies that utilize this technology. Naturally, given the Wild West nature of this entire subject, he is very excited about the future and at the same time, scared silly about what that might look like.
Let’s face it: No one knows how all of this will play out in 20-30 years. My guess is Lindzon will continue to seek the truth separating fact from fiction.
OSTK Distracting From Unprofitable Business
I’ve tried, with little success, to find something in his writings about Overstock’s efforts to move from an online retailer of excess inventory to that of a blockchain incubator.
I have an idea what he’d say but rather than speak out of turn, I’ll tell you what I think.
CEO Patrick Byrne is trying to create a distraction from its primary retail business, which is hopelessly unprofitable. The best number it’s put up over the past decade was in 2013 when it generated a whopping $16.6 million in operating income from $1.5 billion in net revenue.
Not surprisingly, OSTK stock traded around $35 that year; It’s the highest level until this past year when it gained 265% on the back of its blockchain bonanza.
If Overstock was simply an online retailer, there is no way I’d recommend its stock — the same piece of advice I recently gave about Wayfair Inc (NYSE:W) — when you can buy Amazon.com, Inc. (NASDAQ:AMZN), a business that generates almost $10 billion in free cash flow (FCF) annually.
Investing is all about probability.
I can say with certainty that Overstock’s retail business will never generate $100 million in FCF, let alone 100 times that amount.
So, it seems pretty evident that Byrne had to do something to deliver shareholder value and blockchain technology was as good a growth vehicle as any to pivot toward.
I’ll give him that.
Don’t Take OSTK’s Bait
InvestorPlace’s Tom Taulli recently did an excellent explaining the pros and cons of Overstock’s efforts in blockchain technology and if I were living in a bubble, I’d be tempted to get on board.
But I’m not and neither are you.
“Bryne has noted that he is willing to sell it (the retail business) off, which would mean even more cash for his efforts,” Taulli wrote January 10. “And there would likely be willing buyers of the business. After all, major retailers like Wal-Mart Stores Inc (NYSE:WMT), Target Corporation (NYSE:TGT) and Macy’s Inc (NYSE:M) are looking for ways to bolster their e-commerce efforts.”
Frankly, any of these three would be more likely to buy Wayfair than Overstock, but I get where he’s coming from on the subject.
The bottom line on investing in Overstock, as Taulli puts it, is that you’re getting into a venture capital play.
The problem: This has been proven time and again to be a bad idea when it comes to publicly-traded companies.
The blockchain is real. Just don’t confuse making Byrne rich with making yourself a few shekels.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.