Overstock.com Shares Sink and It’s Not Just About Earnings (OTSK)

Overstock NASDAQ: OSTK was down over 17% in late-afternoon trading on November 12. The company’s stock has fallen over 70% since closing at $26.72 just two months ago. The immediate catalyst was a bleak third-quarter earnings report. The company reported revenue of $347.1 million which was below analysts’ estimates for $376.2 million.

Of greater concern were earnings. OSTK had a larger loss per share than analysts expected. The company reported a loss of 80 cents per share, which was lower than the 62 cents per share expected.

Investors are becoming increasingly focused on profit. In its previous earnings report, Overstock said its full-year profit guidance would be dependent on “significant positive earnings” in the third quarter. So the fact that the company’s earnings are not only negative but significantly below expectations is causing investors to question whether profitability is more of an if and not a when.

But Overstock has other problems hanging over the stock. This suggests that despite rapidly approaching penny stock territory, the stock may have further to fall.

Overstock is giving the market uncertainty

In addition to falling revenue, e-commerce is dealing with an exodus of top executives. Earlier in the quarter, Overstock’s then CEO Patrick Byrne resigned under a cloud of suspicion that he was involved in international political conspiracies (more on this in a little bit). On his way out the door, Byrne sold all his stock, which represented over 13% of the company, in a period of three days.

But Byrne was only the first executive to leave. Shortly after his departure, CFO Greg Iverson resigned along with Overstock’s plan for a “digital dividend”.

The company has received a subpoena from the SEC

As if the company needed more bad news, it got just that when it announced that it is cooperating with the Securities & Exchange Commission (SEC) in response to a subpoena for documents. The SEC issued the subpoena in October requesting OSTK turn over documents related to its plan for a digital dividend.

However, the company is also reporting that the SEC is requesting information regarding communications with former CEO Byrne. And the SEC is requesting the 10b-5-1 plans of all officers and directors effective for the time period of January 1, 2018 to October 7, 2019. 

For its part, the company said it is complying but that the company has incurred “significant legal fees and other expenses”

Would a resolution in the trade war help?

In their second-quarter earnings report, OSTK cited the increased costs of tariffs as being a significant headwind on earnings. It’s true that a resolution to the trade war would help Overstock as well as other e-commerce companies. However, with the other issues surrounding the company, it’s hard to quantify how much of an impact a resolution would have for the stock.

Overstock’s blockchain gamble has not paid off

This is the million-dollar question that has investors selling. Former CEO Byrne made a big bet on blockchain technology. His goal was to transform Overstock from an e-commerce company to a blockchain business. The problem was that Byrne seemed to be the only one that really understood what the future company would look like.

Overstock was the first retailer to accept bitcoin as a form of payment in 2014. In 2017 the company launched the Medici Ventures investing firm focused on blockchain technology. It created a public digital ledger of its transactions, and it also began developing its own “security token”, the tZero, for e-commerce and trading.

At the time, Byrne was planning to spin off or reorganize Overstock’s core business by April 2018 to go all-in on blockchain. That deadline passed as did Byrne’s next deadline of February 2019. The stock rose over 20% as investors cheered the news. But the timing was all wrong. Just as Overstock was making a big push into a blockchain, the cryptocurrency bubble and specifically that of bitcoin were deflating.

New CEO Jonathan Johnson remains committed to blockchain technology, but it remains to be seen when, and if, this gamble will pay off. And more importantly, what will Overstock look like if it does.

What is the future of Overstock?

Many investors are looking past the company’s bet on blockchain, particularly with Byrne out of the picture. The question now seems to be when will Overstock be sold and to whom. Walmart NYSE: WMT and Amazon NASDAQ: AMZN seem like potential suitors. However, before any of that can happen, a more fundamental question has to be asked. How much is the company worth?

“It does not surprise me that nothing has happened yet,” remarked Bill Baker, an analyst with GARP Research. The retail sector is notoriously difficult and competitive, and Overstock is still losing money. However, Baker still believes that Overstock’s business could be worth approximately $100 million if it were to be sold.