Overstock (OSTK): Overextended

by Sonya Colberg, TheStreetSweeper Senior Editor - 11/3/2017 9:02:06 AM

Overstock (OSTK) shares look ready to get shot down.

Overstock set itself up for the big plunge after it doubled its stock market valuation by tossing out the words "alt-coins" and  “blockchain.”

Overstock is a Midvale, Utah retailer that sells unwanted furniture and clothing online. Now the company is overstocked with buzzwords and is presenting itself as a whole different kind of cowboy – and the market thinks it may suddenly be worth $1 billion.

Overstock is traipsing into a currency that the nation’s biggest banks and greatest investment minds warn is a dangerous bubble, rippling with illicit activity.

Yep, the wild, wild cryptocurrency West is jammed with scams…

* Overstock and Cryptocurrency Scams

Overstock’s crypto-fueled stock surge began in August, after the online retailer began allowing shoppers to pay with bitcoin and other digital tokens.

In September, the company announced plans for an exchange to trade tokens.

In October, the CEO announced a subsidiary, tZero, intends to hold an ICO – initial coin offering – from Nov. 15 until Dec. 31. Rather than shares of stock, digital tokens would be issued in the private placement.

One problem is that cryptocurrency is the latest weapon in the pump-and-dump and Ponzi scheme world

*Case in point:

The FBI busted the brother of a Morgan Stanley banker on Wednesday on charges he crafted a cryptocurrency scam that relieved investors of $300,000.

Federal prosecutors said businessman Maksim Zaslavskiy touted ICOs that were supposedly backed by real estate and diamonds. But it was all just a scam, according to prosecutors’ complaint. The New York Post reports Mr. Zaslavskiy smiled and winked at his brother, sitting in the back of the courtroom. He faces up to five years behind bars.

*Another case in point:

The SEC recently pounced on a gentleman who created trendy companies and allegedly misled investors into believing they would get rich quick:

*Yet another case:

OneCoin, which pitched itself as the next Bitcoin, has been denounced as a Ponzi scheme by multiple national authorities. It is believed to have moved over $350 million in allegedly scammed funds through a German processor.

*Warren Buffett: “A mirage.”

Meanwhile, none less than billionaire icon Warren Buffett thinks coin offerings will end badly.

“People get excited from big price movements, and Wall Street accommodates,” said Mr. Buffett.

He described bitcoin as a “real bubble,” adding: “You can’t value bitcoin because it’s not a value-producing asset.”

Mr. Buffet several years ago warned that cryptocurrency is “basically a mirage.”

(Source: CNBC)

Saudi prince Alwaleed bin Talal suggested cryptocurrency could be setting up for an Enron-like collapse because of the lack of a centralized governing authority.

“It just does not make any sense. It is not under the supervision of the United States Federal Reserve or any other central bank,” said the tech trend guru. “I don’t believe in it at all.”

* Dimon: “A fraud.” Fink: “Money laundering.”

JP Morgan Chase chief executive Jamie Dimon says cryptocurrencies “won’t end well."

(Source: Bloomberg)

Mr. Dimon added that he would fire any employee caught trading bitcoin.

“It’s a fraud,” he said.

BlackRock CEO Larry Fink called cryptocurrency bitcoin an “index of money laundering.”

(Source: CNBC; Larry Fink)

Credit Suisse and ING both indicated Thursday they wouldn’t get caught up in the cryptocurrency craziness, which many experts say reminds them of the dot-com boom and crash.

ING chief financial officer Koos Timmermans said the bank is not recommending that clients invest in digital currencies.

Credit Suisse CEO Tidjane Thiam said most banks “have little or no appetite to get involved in a currency which has such anti-money laundering challenges.”

*SEC Says Watch Out

Cryptocurrency’s explosion in popularity among less sophisticated investors has spurred a recent SEC warning. The agency warns that ICO investors may expose themselves to potential scams and “pump and dump” schemes:

“Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams.  These frauds include “pump-and-dump” and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.”

But, wait …

*Hold on a Sec

 If Overstock’s worth shot to a billion bucks virtually overnight, the company has changed a lot, right?

Nope.

*Overstock is unprofitable. It lost $14 million the first half of this year.

*The price-to-cash flow - 739 times cash – is ridiculously high.

*Today’s price is ~$15 over analysts’ average 12-month price target of $30.50…

 

  (Source: Etrade)

... Implying about a 34% downside.

*Overstock vs. Industry

Overstock’s gross margin – 19% - is worse than 81% of its peers.

The company’s growth rate seriously lags behind rivals’

(Source: CNBC)

So the only change is the mention of alt-coins and “blockchain,” which is a computerized ledger that keeps track of bitcoin transactions.

And, despite all the media and chatroom attention, that change adds multiple layers of risk for Overstock.

*Will Desperate CEO Again Imply Shorting Wayfair?

Desperate companies have desperate ways and we expect to see more desperation come to light in the third quarter – once the company finally reports earnings.

Regardless, investors got to hear CEO Patrick Byrne whine during the last earnings report. With good reason. Net losses were more than 6 times the year before.

“What’s happened is it became significantly more expensive to drive revenue than we had anticipated,” he said.

Overstock apparently found itself considering spending millions in advertising dollars that it really didn’t have (2Q cash dropped to $104m) to try to keep up with Wayfair and Houzzz.

Patrick M. Byrne - Overstock.com, Inc. - Founder, CEO, and Director

“And then lastly, what's going on is Wayfair. When I tell you about Wayfair, I don't need letters saying, oh, stop telling us to short Wayfair, I'm not telling anyone to short Wayfair, do what you want.

“I think … it's kind of silly at this point not to talk about our competitive position vis-a-vis Wayfair given that they have just come in and so heavily dominated and I would say distorted the marketing landscape in an unsustainable way.”

So Overstock had to jump on the cryptocurrency wagon as a way of boosting the stock price amid rising losses and rivals’ domination.

Besides, we believe nonbank finance firms like Cumberland Mining and Genesis Global Trading, plus companies like Goldman Sachs Group – which The Wall Street Journal reported Thursday is weighing a trading operation dedicated to digital currencies – will squash any Overstock efforts.

 *Conclusion

In the shootout at the cryptocurrency corral, we think the Overstock investors who got caught up in the excitement will ultimately turn and bolt away.

After grabbing onto the bitcoin trend, Overstock is super risky and massively overvalued. The short squeeze should be over and the stock price should settle in between here and $30. 

 

* Important Disclosure: The owners of TheStreetSweeper hold a short position in OSTK and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to streetsweepereditor@yahoo.com.

 

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