The StreetSweeper recently published an unfair evaluation of Overstock.com Inc. (OSTK, Financial). I want to address some of their more misguided arguments.
Overstock has been involved in bitcoin and blockchain for years. The report suggests the company merely jumped on the hype train to cash in.
"Overstock set itself up for the big plunge after it doubled its stock market valuation by tossing out the words 'alt-coins' and 'blockchain.'”
That is the first unfair characterization. For full disclosure: Overstock is one of our positions in The Black Swan Portfolio. On April 29, 2015, I wrote an article which mentioned Overstock’s tZero exchange, which is based on blockchain technology.
That was over two years ago.
Admittedly, CEO Patrick Byrne can sound fairly promotional and uses a lot of hyperbolic language when he is excited about developments at the company. But he has always done this and has been talking about blockchain for years.
Did the stock double shortly after Overstock started working on blockchain tech?
No, it did not.
This is what it did for the next two years after the article I wrote was published:
Contrary to claims otherwise, Overstock actually started accepting bitcoin in January 2014, not just recently. The fact the company started to accept cryptocurrency is surely not a cause for the recent run up.
Like the StreetSweeper article, one could argue Overstock is an unprofitable company. I guess that is not factually incorrect, but if you review EBITDA or cash from operations, the picture becomes a little bit more nuanced. In addition, Overstock has been investing heavily in its Medici segment - a blockchain-focused segment - which is a hangover on profitability metrics. Amazon.com Inc. (AMZN) is often criticized for being unprofitable, but few consider it badly run.
One could also argue Overstock has not been growing very much, but I think that is where you really get on thin ice.
(Source: CNBC)
The chart above, which TheStreetSweeper presents in its report, gives the impression Overstock’s revenue is falling by comparing it to rivals. This is the actual picture of Overstock's revenue development:
Furthermore, I would go as far as saying its balance sheet is pristine. The company has approximately $100 million in cash. We are talking about a company with a market cap that is only at $1.1 billion after the recent surge in stock price. It has only $57 million in debt. I am confident Byrne could tap into a lot of liquidity if he wanted to.
Overstock managed to get the first stock trading on its blockchain exchange, tZero. It managed to overcome a huge regulatory burden to do so. There is still no bitcoin ETF in sight despite the best efforts of large financial firms. Now it looks like the company is going to be the first to have a fully functioning, legal, U.S.-based initial coin offering (ICO) exchange. This is a completely different thing from running a trading operation as Goldman Sachs (GS) may start (complete speculation at this time).
Overstock going forward
Overstock ”‹outlined ”‹a ”‹plan ”‹to ”‹raise ”‹capital ”‹through ”‹an ”‹ICO. An ”‹ICOÂ ”‹is ”‹somewhat ”‹like ”‹an ”‹initial ”‹public ”‹offering (IPO). ”‹An organization ”‹raises ”‹capital ”‹by ”‹issuing ”‹and ”‹selling ”‹“crypto ”‹tokens” ”‹and ”‹it ”‹usually ”‹promises ”‹a future ”‹benefit ”‹to ”‹buyers.
A ”‹capital ”‹raise ”‹is usually ”‹bad ”‹news ”‹because ”‹it ”‹means ”‹a ”‹company ”‹is ”‹in ”‹a ”‹tough ”‹spot ”‹and needs ”‹to ”‹dilute ”‹its ”‹future ”‹cash ”‹flows ”‹to ”‹save ”‹itself. That is ”‹certainly ”‹not ”‹the ”‹case ”‹here.
I ”‹identify ”‹two ”‹reasons ”‹for ”‹Byrne ”‹making ”‹this ”‹move:
- Putting ”‹the ”‹new ”‹Overstock ”‹ICO ”‹exchange ”‹on ”‹the ”‹map ”‹with ”‹a ”‹real ”‹"Chuck ”‹Yeager moment," ”‹as ”‹he ”‹likes ”‹to ”‹call ”‹it.
- To ”‹take ”‹advantage ”‹of ”‹raising ”‹capital ”‹at ”‹very, ”‹very ”‹loose ”‹terms.
Shareholders ”‹benefit ”‹from ”‹both ”‹objectives. ”‹In ”‹return, ”‹Overstock ”‹will ”‹need ”‹to ”‹give ”‹away ”‹some ”‹of ”‹the ”‹upside ”‹within ”‹its ”‹crypto ”‹business ”‹to ”‹the ”‹buyers ”‹of ”‹these ”‹tokens.
If ”‹you ”‹feel ”‹bad ”‹about ”‹it, ”‹just ”‹remember ”‹that ”‹up ”‹until ”‹today ”‹Overstock’s ”‹crypto ”‹business continues ”‹to lose money. As ”‹an ”‹Overstock ”‹shareholder, ”‹you will ”‹be selling a share of a cash -draining business ”‹for ”‹up ”‹to ”‹$500 ”‹million - with the upper range of this figure looking fairly unlikely at this time - ”‹in cash, ”‹which ”‹equals ”‹about half ”‹of ”‹the ”‹company's ”‹enterprise ”‹value.
If ”‹the ”‹ICO ”‹is ”‹a ”‹success, ”‹you ”‹end ”‹up ”‹with:
- ”‹Up to $500 ”‹million ”‹of ”‹additional ”‹cash ”‹on ”‹the ”‹balance sheet. ”‹
- ”‹Higher ”‹profits.
Theoretically, ”‹as ”‹in ”‹any ”‹transaction, ”‹it ”‹is ”‹possible ”‹the ”‹above ”‹scenario results in getting ”‹“the short ”‹end ”‹of ”‹the ”‹stick” ”‹as ”‹an ”‹Overstock ”‹shareholder. If ”‹this ends up being the the ”‹short ”‹end, ”‹I will ”‹graciously accept ”‹that fact.
Best course of action
In a vacuum, I consider Overstock a hold ”‹or ”‹even ”‹buy ”‹until ”‹there ”‹is ”‹more ”‹information ”‹about ”‹this ICO ”‹event or another corporate transaction. Purely based on fundamentals, ”‹I ”‹would ”‹like ”‹to trim ”‹this ”‹position. Because ”‹of qualitative factors like ”‹the ”‹near-term ICO ”‹event; ”‹holding ”‹or ”‹even buying ”‹is ”‹the ”‹superior choice. For ”‹some ”‹reason ”‹that ”‹I ”‹do not ”‹entirely ”‹understand, companies ”‹can ”‹obtain financing ”‹at ”‹extrememly attractive ”‹rates ”‹through ICOs. ”‹As ”‹a ”‹shareholder ”‹of ”‹Overstock, ”‹we ”‹are ”‹potentially positioned ”‹to ”‹benefit ”‹ ”‹from ”‹this influx ”‹of ”‹cash.
Disclosure: Author is long Overstock.
