Overstock Inc. (NASDAQ: OSTK) has posted their earnings report for Q4 2019.

Revenue came in at $370.9 million, which beat analysts’ estimates of $356.66 million.

EPS was -$0.74, which missed analyst’ estimates of -$0.34

Overstock has taken some big hits in the past few years, even before the recent stock market crash. The stock traded at highs of over $80/share back in 2018 and has now crashed all the way down to around $4/share. Much of the problems surrounding Overstock can be traced to its controversial former CEO, which has gotten the company embroiled in conflicts.

 

First of All Though, What Is Overstock?

Overstock started in 1997 in Utah as a website and eCommerce platform aimed to help companies liquidate their extra inventory or returned merchandise from customers.

The company made some early profits when it liquidated the inventories of many companies that went bust around the time of the Dot Com Bubble.

Today, Overstock mainly deals with furniture and home decor and related merchandise.

It has also expanded into selling some new merchandise on top of its offerings of discounted returned items.

 

A Controversial CEO to Say the Least

The then-CEO of Overstock, Patrick Bryne has been very vocal about his displeasure at the practice of naked short selling, which is when an individual or company shorts the stock of another company without having borrowed the shares.

Bryne pushed hard for the adoption of Bitcoin and Blockchain technologies within the company and even went as far as accepting payments on the site in Bitcoin and dumping at least $175 million in bitcoin or other blockchain investments.

However, despite this, the investments most likely failed as the firm never recorded any profits from these investments.

In February 2007, Overstock.com launched a $3.5 billion lawsuit against Morgan Stanley, Goldman Sachs and other large Wall Street firms, alleging a “massive illegal stock market manipulation scheme”. The lawsuits were all eventually dismissed or settled out of court, but this campaign led to the resignations of Overstock board members including John Fisher and Ray Groves.

Back in August 2019, Patrick Bryne suddenly resigned in an email and admitted to a romantic affair with the Russian Maria Butina, who pled guilty to conspiracy to act as an unregistered foreign agent of Russia within the United States.

 

Valuation

At first glance it would appear that Overstock is trading at an insanely low valuation compared to some of its peers. Coming in at a P/S ratio of just 0.08

Taking a deeper look as to why the valuation is so long, it soon becomes clear, as Overstock is underperforming its peers by having a negative EBITDA (and as a result, a negative EBITDA Margin) in a time when other eCommerce sites are posting double digit margins.

Looking at growth trends for revenue and EBITDA, it is also very disappointing as both have drastically underperformed other eCommerce platforms.

The bad performance may be tied to the company’s risky bets in Bitcoin and blockchain technology. Bitcoin prices hit an all time high in late 2017 before promptly crashing throughout 2018.

Although Overstock has some cash now (over $80 million according to Yahoo! Finance), it has reported a negative free cash flow for the past 3 years, and the growth is simply not there.

It is unclear exactly how much money the company held in Bitcoin at the time and exactly how much money was poured into R&D regarding Bitcoin.

However, this demonstrates how it’s always risky when a company decides to get involved in cryptocurrencies.

The recent stock market crash has also hit the stock hard as with most stocks in the general market. Investors now should seek to pick up quality stocks with good balance sheets and high growth potential.

Although Overstock has some cash now (over $80 million according to Yahoo! Finance), it has reported a negative free cash flow for the past 3 years, and the growth is simply not there.

It would appear that investors should avoid this stock and deploy their capital elsewhere for the time being until we see some sort of growth catalyst or new potential.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.