Overstock.com
Overstock.com (OSTK): Unprofitable internet retailer. The company’s business strategy is to offer the absolute lowest prices. It intends to make a profit on very large volume, by growing sales fast enough to allow the company to turn a profit and keep gross margins down. Overstock has been cash flow negative for most of its history. At present, its balance sheet is solid. It has even used some cash to buy back shares. Solvency and eventual profitability are entirely dependent upon strong revenue growth. If Overstock fails to grow sales quickly, it will not be viable as a going concern. If, however, Overstock can grow sales quickly, it will likely earn a very high return on capital for a long time to come.
The company has a market cap of about $300 million. On January 17th, 2006, I argued Overstock was worth at least $1.5 billion.
On November 8th, 2006, I changed my tune. After the company reported a year-over-year decline in revenues for the third quarter of 2006, I realized I didn't understand the business. As a result, I had lost all confidence in my earlier analysis.
I consider myself a rationalist value investor rather than a contrarian value investor. I look for those companies selling at the greatest discount to their intrinsic value and buy them, regardless of investor sentiment. Therefore, I don’t normally discuss the optimism or pessimism surrounding a particular stock.
However, I would be remiss if I did not note the simple fact that I have never witnessed such pervasive and virulent pessimism as that which is now directed at this company and its unorthodox president. A search for Overstock in Google’s blog search will provide you with a sample. I would include these pessimistic pieces; however, I did not find any of real value. If you know of any well – reasoned negative commentary/analysis on Overstock, please let me know by sending an email to geoff@gannononinvesting.com. I will be happy to add negative commentary that is of the same caliber as the following links.
Here are four worthwhile pieces on Overstock:
The Motley Fool’s January 28, 2005 article: “Overstock’s Underappreciated”
The Motley Fool’s April 11th, 2005 article: “Overstock’s Secret Weapon”
Shai Dardashti’s views on Overstock expressed at Vinvesting.com
Shai Dardashti’s personal thoughts on Dr. Patrick Byrne, President of Overstock.com
Request investor info for Overstock
Related Reading
An Analysis of Overstock (OSTK)
Comments
Actually,
The margins at Amazon and Overstock are calculated differently, as pointed out in a conference by Byrne. Comparing apples to apples currently Overstosck's 15% is better than Amazon's, using the same accounting.
The one time IT mess up really hurt them last year, 100-150 million in sales lost plus too much spent on IT. It could have broken even last year....I imagine the stock would be at 50 now at least if they broke even...
Posted by: Deevo | April 20, 2006 10:21 PM
Do you have a guess on what is going on with the cancelled stock offering? To whom and why?
Sheldon
Posted by: Sheldon | June 6, 2006 12:42 AM
A great question, but no I don't have a guess. Also, without knowing the buyer, I can't say whether the reason for cancelling was or was not specific to the buyer. It was a strange episode, but as the specifics aren't known, you can't read anything into it.
Posted by: Geoff Gannon | June 6, 2006 01:06 AM
I shouldn't say I don't have a guess. Rather, I don't want to guess. I think everyone has the same guess as to what entity would be most interested in adding to its OSTK stake, but I just don't want to throw fuel on the fire.
Posted by: Geoff Gannon | June 6, 2006 01:13 AM