Overstock.com Inc (NASDAQ:OSTK) CEO Patrick Byrne raised more questions than he answered in yesterday’s earnings report. In response, OSTK has plunged 9% as of this writing.
And if we’re being honest, even despite the confusion, it’s not like the selloff wasn’t merited. Sales were somehow down year-over-year despite robust consumerism on almost all other fronts. And worse, the e-commerce player swung to a loss. Then, Byrne effectively told shareholders to expect margins to remain thin (and perhaps negative?) for the foreseeable future.
It’s getting pretty difficult to find any merits with Overstock.
OSTK Earnings Recap
For the quarter ending in December, Overstock.com lost $109.9 million, or $4.28 per share, on sales of $1.75 billion. Adjusted, the loss was pared back to only $95.7 million, or -$3.72 per share of OSTK stock. It was of little solace though, with the top line shrinking 3% from the year-ago total of $1.8 billion, and in comparison to earnings of 12 cents per share.
In the company’s defense, the recently-enacted tax reform act took a toll, costing OSTK $54.9 million.
A closer look at the numbers, however, makes it clear that Overstock.com was going to swing into the red without tax reform. While sales were down 3%, sales and marketing costs were up 22% year-over-year, gross profits fell 12% and administrative expenses were up 12% to $24.1 million. The operating loss was $22.7 million.
The company was never going to be profitable for the quarter.
Meet the New (and Improved?) Overstock
What happened? Byrne wasn’t shy about blaming rival Wayfair Inc (NYSE:W), pointing out the competing online-furniture company posted a pre-tax loss of $244 million in 2017.
There’s some validity to the idea. It’s difficult to compete with a company that’s willing to bleed money in the name of revenue growth and customer acquisition. Just ask anyone that’s had to compete with Amazon.com, Inc. (NASDAQ:AMZN). So, to combat its competitor’s tactics, Byrne intends to copy them. In the earnings press release, he explained:
“I believe it is time for us to respond in kind. Thus, I am announcing that we are for the first time adopting the classic internet ‘growth strategy’ I have previously eschewed: high growth, negative GAAP net income, funded out of our negative cash conversion cycle.”
It’s a decision most OSTK stock holders aren’t quite sure what to make of.
On the one hand he’s right… there’s no benefit in changing nothing but expecting different results. On the other hand, this tweak of the business model may well make Overstock.com’s e-commerce venture unownable right as Byrne is looking to sell it so he can focus on developing a cryptocurrency exchange and blockchain technologies.
Indeed, even that new endeavor isn’t looking so hot anymore. With the earnings report, Overstock also told investors the Securities and Exchange Commission was investigating the company’s plans.
Just a little over a week ago, the SEC said it was looking to regulate cryptocurrency. Anything that stifles the adoption cryptocurrencies makes it a less compelling business to be in.
And since OSTK shot up to its recent highs after Byrne announced the foray into crypto, this is especially bad bit of news for Overstock.
Looking Ahead for OSTK Stock
Broadly speaking, an earnings report and an earnings call should answer more questions than it raises, and be reassuring rather than alarming to investors. Overstock.com just didn’t make that happen.
That said, perhaps the more alarming nuance of last quarter’s report is a lack of clarity over whether or not Byrne even wants to be in the e-commerce business.
He made it clear last year he doesn’t. Yet the sweeping changes Byrne is making on that front are the kind that end up being long-term commitments. Indeed, Byrne even conceded in his note to shareholders “our philosophy has always been to run every asset like we intend to own it forever and our strategy discussion will be framed in that mindset.”
Fine, but that may well limit the chances of finding a suitor.
Whatever’s in the cards, there’s more uncertainty on the table here than most investors care to deal with. Who can blame them for dumping their OSTK stock en masse?
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
