Few stocks in recent years have taken the ride that Overstock.com (NASDAQ:OSTK) has. The OSTK stock price was $16 at the end of July 2017. Within less than six months, the price was over $90, as Overstock benefited from bitcoin/blockchain optimism. And by December of last year, OSTK was back at $12.
The OSTK stock price has seen a nice bounce this year, gaining 50% just since the New Year and 63% from those December lows.
And there’s an intriguing case here. The tZERO subsidiary has some interesting opportunities in blockchain. Even assigning zero value to that subsidiary, and backing out the company’s $179 million in net cash, OSTK trades at 0.24x fiscal 2018 (ending January 2019) revenue estimates.
Fundamentally, there are reasons why OSTK soared early last year — and why it traded at twice its current price as recently as August. But there are problems here — including one big issue that suggests that OSTK might not be cheap enough.
Why The OSTK Stock Price Could Rise
OSTK has seem some strength of late, due to optimism toward its tZERO business. Trading of tZERO security tokens went live in January, which led OSTK to rise 16%. The subsidiary (which Overstock.com owns 80% of) raised $134 million in the offering last summer, and the live trading suggests it’s ready to benefit from its efforts in the blockchain space.
And this does seem to be a real business, unlike more questionable efforts from companies like Riot Blockchain (NASDAQ:RIOT) and Eastman Kodak (NYSE:KODK). Investors have been frustrated with the pace of the rollout, admittedly. But Overstock.com has worked with the SEC to ensure its platform is legal and regulated.
In the legacy online retail business, the news has been weaker. Revenue growth through the first three quarters of fiscal 2018 has risen just 6.3%, including a disappointing 4% in the third quarter. That’s despite an enormous increase in sales and marketing expense, which has risen $100 million year-to-date, increasing losses at the units.
But there’s hope there, too. CEO Patrick Byrne has wanted to sell the unit for some time. Rumored acquirers have included Kroger (NYSE:KR), and more recently, Walmart (NYSE:WMT). (Rumors of a sale to Walmart appear to have spiked the stock earlier this month.) Even a 0.3x multiple would move the OSTK stock price higher and suggest that the tZERO business is available essentially for free.
The Trust Problem for OSTK
There are some issues here, however, as attractive as the fundamentals may look. And the biggest issue at the moment is trust. Byrne, in particular, continues to make promises and claims that he and Overstock.com simply haven’t been able to back up.
As I pointed out last year, Byrne has talked endlessly of using the blockchain to disrupt the securities lending business. But he repeatedly has exaggerated the value of that business at Goldman Sachs (NYSE:GS) (a longtime target of Byrne, who has alleged for years that the firm encouraged ‘naked’ short selling).
The CEO told the Wall Street Journal in November that the retail business would be sold by February. OSTK stock soared on the news.
Since today is March 1, I can now say that Overstock missed that target.
GSR Capital was supposed to invest up to $400 million in tZERO and Overstock, at a valuation of $1.5 billion according to an Overstock press release in August. OSTK stock again gained. But in December — the day before the deal was supposed to close — the company gave GSR an extension, detailed in an 8-K filing.
The extension expired also expired at the end of February. Just today, a press release extended the timeline again, now saying the deal will be completed in April.
…We’ll see if that happens.
Overstock’s Strategy Problem
This isn’t just a case of missing targets, either. The entire strategy here looks increasingly questionable.
Most notably, after Q4 results last year, Byrne decided to change the Overstock.com model. Overstock.com had spent years chasing a “rational” model, as Byrne termed it. But competition from retailers like Wayfair (NYSE:W), who seemingly had little interest in profitability, simply was too difficult to overcome.
So Byrne decided essentially that if he couldn’t beat ’em, he’d join ’em. It was a strategy shift that I argued at the time made OSTK uninvestable. Indeed, Overstock ramped up its spending — and unsurprisingly, the strategy failed. Revenue growth remained relatively stagnant, losses widened sharply, and Byrne changed his mind just two quarters later.
Even on the tZERO side, it’s not clear at this point exactly what drives profits for OSTK and how. Byrne’s visions are increasingly grandiose: the CEO told MarketWatch this month that the company could fix the crisis in Venezuela “with six laptops”. Shareholders would no doubt settle for a coherent strategy… and a real business.
Increasingly, it’s difficult to even recommend putting money behind Byrne, let alone actually doing so. It’s still possible GSR Capital will come to a similar conclusion. Many investors over the last twelve months already have.
There is promise here, and huge upside if Overstock.com can sell the retail business and create a real business out of tZERO. On both fronts, however, there are plenty of reasons for skepticism.
As of this writing, Vince Martin has no positions in any securities mentioned.
