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John Engle
John Engle
Articles (154) 

Can Overstock Reinvent Itself With Blockchain Tech?

The struggling internet retailer’s big bet carries big risks

September 13, 2018 | About:

Internet retailer Overstock.com Inc. (NASDAQ:OSTK) has had a rough go of things lately. Shares are down 58% so far this year, and the share price erosion has only accelerated in recent months. Over the course of just three painful trading sessions in August, the company's shares dropped from $48 to $33. They are now under $30.

The key problem is Overstock’s legacy online retail business, which continues to bleed badly. There are also swirling questions about its other business lines and strategies, which some investors, such as legendary short seller and trader Marc Cohodes, believe will be worth far more than the current core business (and which are currently not reflected at all in the share price).

Let’s see what’s been happening at Overstock, and whether the future may be brighter for the troubled company.

Out with the old

Overstock's online retail business has gone from anemic to bleeding badly. Trying to play in the same space as the likes of Amazon (NASDAQ:AMZN), even if it targets a decent competitive niche, is a seriously hard business. Rather than try to turn that segment around wholesale, the company has opted for an alternative strategy: selling the legacy retail business and pivoting to other ventures.

Of course, it has yet to find a buyer for that legacy business. Currently, Overstock has a market capitalization of just over $800 million.  In a recent interview, Cohodes said he believes it can offload its retail business for the $500 million to $1 billion. If that were to happen, the dark clouds shrouding Overstock would part almost immediately.

The problem is that depends on Overstock finding an interested buyer willing to pay a premium for an obviously struggling internet retail platform. That has yet to happen, and may prove challenging. Cohodes’ high-end price looks virtually impossible. After all, why would a company buy Overstock’s internet retail arm for a premium to the whole company, when it could get the legacy business and the new business lines all together for under $1 billion. Even $500 million for the legacy business looks like a stretch. Given Overstock’s weakening financial position, it is hard to see it wielding much negotiating power in such talks.

In with the new

Overstock is making a big play to transform itself into a very different kind of business. Specifically, it is aiming to become a major player in the blockchain market, investing heavily in blockchain technology and entering the hot cryptocurrency and tokens space. Medici Ventures, a wholly owned subsidiary, is Overstock’s vehicle for penetrating the blockchain and crypto market. Medici has made investments in, or purchased outright, numerous crypto and blockchain-related businesses. At the top of the list is tZERO, a blockchain trading platform that incorporates risk management software and order management systems. According to Cointelegraph.com, the company is betting on tZERO, its wholly-owned subsidiary, to make it a key player in the crypto space:

"While Overstock announced its intentions to build an alternative ICO token trading platform late last year, tZERO initially introduced the prototype of its security token trading platform in April. Developers aimed to present a means of trading security tokens which are backed by real assets and are somewhat an interlink between blockchain and the traditional financial sector.

The platform will purportedly allow traders to exchange tokens 'in an easy, compliant, and user-friendly manner' with features such as risk management software, an order management system, matching engine, and others."

There is no denying that blockchain and crypto are hot right now. But they are also new technologies full of volatility and risk. Yet another major selloff in the crypto market this week shows just how fickle and unproven the market is. Of course, these technologies are here to stay and may prove valuable to a range of businesses. Yet Overstock’s investments may not be the winners in a rapidly changing and adapting market.

Verdict

Overstock bulls see tremendous value in the tZERO platform. Cohodes, for example, has assigned a value of about $1.5 billion to the subsidiary alone. Obviously, if realized, that would represent enormous upside for Overstock stock. But it is still a big if. Blockchain and crypto are new industries. There is great room for growth, but also huge potential for volatility. Overstock is taking a big leap into dark waters.

It is tempting to think of Overstock as a potential hidden value play, with a legacy business that could net hundreds of millions of dollars if and when it is sold, as well as value in its rapidly growing blockchain ventures hidden under the surface. But we see too many ifs at this stage to justify taking the plunge.

Disclosure: I/We own no stocks discussed in this article.

About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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