Yesterday we published our In Depth Analysis of Overstock.com (OSTK) Stock – Part 1 in which we looked at some of the business fundamentals of Overtstock.com’s blockchain technology business, as well as the Bullish Argument for Overstock.com stock.

Today, we explore our Part 2 In Depth Analysis of Overstock.com (OSTK) article, which is divided into 2 Parts :

Part 1 of this post consists of The Story So Far and Bullish Argument on Overstock.com

Part 2 of this post consists of Bearish Argument on Overstock.com and Conclusion









Bearish Argument on Overstock.com

Retailer Entering into Blockchain Space : Why?

We are optimistic with regards to the future of blockchain technology and cryptocurrency – even more optimistic on the opportunities of investing publicly traded blockchain and cryptocurrency companies. In recent past, this sector has drove good amount of attention from the investors. Our question is focused more on a root cause – Why go into cryptocurrency? A Company which is at the mature stage of the life cycle, having stable and consistent business growth, sitting on a cash pile looking to enter into totally new venture (unrelated to its existing business) is understood.

But this was surely not the case with overstock.

Assuming markets are efficient, just looking at the graph of overstock for last 5 years (prior to entering into the crypto space), did you see any uptrend? Can we assume that Overstock retail business remained a mediocre business which should have focused and growing in its space rather than entering the Blockchain business, as this is something in which everyone is talking about?

Equity Dilution on Every Offering

Raising money from outsiders is good thing, but if it’s coming at the cost of Equity Dilution then that can likely be a red flag. On Q3 FY2017 earnings announcement, this happened:

I am pleased to announce that we have sold a warrant to a fund affiliated with Passport Capital LLC for $2.6 million to purchase 1,250,000 shares of our common stock at $40.45 per share until February 7, 2018. We also sold a warrant to Quantum Partners LP for $4 million to purchase 2,472,188 shares of our common stock at $40.45 per share until January 2, 2018. Quantum Partners LP is a private investment fund managed by Soros Fund Management LLC.

The announcement above had an almost 15% equity dilution effect. Additionally, another dilution has recently occurred:

And as we work with GSR, they’ve become interested in ownership across all levels of our enterprise. We reached terms for them to invest across all of these levels, up to $270 million in tZERO equity at $1.5 billion post-money valuation, $104 million in OSTK based on a 5% discount with the closing price on August 1 and a repurchase agreement to buy the tokens Overstock is receiving in return for intercompany debt repayment.

For investors who believed and invested in the overstock’s growth story at the earlier stage, took the highest risk by investing in just the concept or an idea even , they wouldn’t be getting compensated as much as they should have because of the equity dilution from warrants and common stock.

Consistent Insider Selling

The insiders remain net sellers for the past 2 years.

Very High Short Interest

A very high short interest in the stock price usually means that “the smart money” (big institutions) carry the bearish expectation on the overstock. Even though the stock has significantly corrected from its high, still more than 40% short interest is there. This conveys that institutional funds are still convinced about the further downward movement of the overstock. We can assume that the actual stock price will only be Low Growth E-commerce business with small cash flows and very low value of crypto segment (unless there is an unexpected boom in the crypto market).

A Foolish Move of Accepting Cryptocurrencies?

We have mentioned this point in the Bullish argument also. There is a big possibility that this move may backfire for Overstock.com, if it cannot properly manage processes.

But first let us clarify to the loudest that “Blockchain is the future“. The benefits which it provides will supersede all other technologies. E-commerce will surely be much better with the adoption of Blockchain technology. The implementation which we are talking about is related to the operational aspects of e-commerce business like supply chain management, customer relationship management, inventory processing, and others.

The threat which we are referring to is related to “Revenue and Costs“.

When your entire eco-sphere of funds inflow and outflow remaining in a single currency, then things are easier to manage. Overstock.com is retailer. In simpler terms, it obtains its profits in “Commissions” which is the difference between selling price minus purchasing price.

If Overstock is doing the business operation entirely in conventional currency or cryptocurrency, then things are ok. But if the merchandise is purchased in conventional currency and sold in cryptocurrency, then that creates a big problem. Based on the Net Long or Net Short position of Cryptocurrency, this same problem will increase on the appreciation or depreciation of cryptocurrency with regards to conventional currency. Things then can become chaotic and unmanageable.

One thing in which everyone can be sure of is that there will be volatility in the cryptocurrency market for the foreseeable future. Things are still in the nascent stage and a graph of market prices will look similar to the early internet days, where internet companies were hyped, the bubble bursted, and then the technology matured and stabilized.









Conclusion

Overstock has positioned itself well in the direction of adoption of blockchain technology. The company will generate a great deal of returns on topline and bottomline, if they are properly able to manage the things. If we view the crypto business tZERO as not adding any substantial value to the stock price yet, then it’s safe to assume that the intrinsic value of Overtstock.com (OSTK) stock price (which we can assume to be the stock price of overstock before entering into blockchain) will remain. Obviously the underlying assumption is that they are able maintain their E-commerce to at least a mediocre growth level, which they had prior to entering into the blockchain space.

As with all analysis, more information and time are needed to become more confident about the short term trend/movement of Overstock.com’s stock price. Keep an eye on the next two to three quarters, as they have incurred higher expenditures and delayed work progress.

What are your thoughts on the Overstock.com (OSTK) stock price? Leave your comments below.

Disclaimer