03 December 2018 – Is Blockchain the right direction for Westock?


As a CEO, what would you do if your company's core business started appearing in the BCG Matrix "Dog" quadrant?

It's time to make tough decisions, and that's exactly what Overstock (NASDAQ: OSTK) CEO Patrick Byrne did in the week before when he announced that the Overstock retail trade should be sold by February 2019. The company, an online retailer of furniture, housewares, jewelry, watches and home decor in Utah, has over 20 million visitors on its platform every month, but has faced problems with increasing losses and declining growth . It is expected that the proceeds realized from the sale of the core business will be used for the expansion of the blockchain business that the company had started in 2014.

Is the transfer of the core business to the blockchain a correct decision?

Before making immediate judgments, it is advisable to analyze Overstock's current business fundamentals to determine whether or not it is a logical decision. The fact is that, like most e-commerce companies, Overstock is not Amazon (NASDAQ: AMZN) when it comes to growth and margins. The company has suffered losses for many years and its return on invested capital (ROIC) is -508.88%. The current net margin of Overstock is -14.21% and its return on equity is ridiculously low at -157.76%. It is safe to conclude that the company has destroyed shareholder value over the years.

The only reason why the market was optimistic about the company and that in the past had gotten a decent rating was due to a metric, revenue growth. But this metric has been slow in recent years as the rate of growth of three-year revenues is 4.2%. This leaves little room for optimism, especially among prudent financial investors.

However, the news regarding the divestiture of this business and the increased attention to the blockchain changes things. This decision has created a ray of hope for long-term investors. Obviously, the company's exit from its current business and its entry into a new technology imply a high amount of liquidity losses for the next few years, so there's really a lot to be expected in terms of strengthening financial fundamentals. In fact, it is possible that these could worsen significantly for some years. In addition, the risk surrounding the stock is likely to increase and the beta, which is already as high as 2.43, should grow with increasing volatility. But the ray of hope lies in the history of blockchain growth and the expected assessment that Overstock can get for its retail business.

Why is evaluation so important?

As for the sale, Overstock needs a significant amount of money. It is expected that management will invest these proceeds in the blockchain business, which is a practical necessity, since the new business will burn money for many quarters. Therefore, the valuation of this business is absolutely critical, not only for good short-term equity performance, but also for the long-term prospects of Overstock's blockchain business.

Currently, Overstock's most popular peers are Bed Bath and Beyond (NASDAQ: BBBY) and Costco (NASDAQ: COST), and both of these companies trade with an EV-revenue ratio of less than 1, despite being profitable entities. It is possible that the Overstock retail business achieves a value well below last year's revenues, which is probably not the best news for management.

As we can see, the stock has plummeted from levels above $ 85 to less than $ 20 in less than a year. A poor evaluation during the sale could cause a further accident. However, the positive side of Overstock is that most of the blockchain developers negotiate on a multiple of EV revenue of over one, which implies a possibility of multiple expansion and a possible increase in the price of shares once the company is able to to monetize blockchain investments.

What's next in the blockchain business?

The good news for Overstock's shareholders is that the company is certainly not new to the blockchain world. He invested in technology for four years through his arm known as Medici Ventures.

One of Medici's main investments is tZero, a potential secure token platform that acts as a commercial exchange of shares and cryptocurrencies. While tZero already has a significant amount of competition from BitDepositary and Kickico, it could prove to be a more unique concept if well developed.

Another key investment by Medici is a minority stake in Bitsy, a cryptocurrency portfolio. It is likely that there are many other investments that are expected from Overstock and Medici in the near future so that the company can build a solid and diversified portfolio of cryptographic products.


To summarize, Overstock has faced the stagnation of its business due to increasing competition and price pressures. Margins have always been negative and the decline in the growth rate has already reduced the stock to about a fifth of its maximum of 52 weeks. The sale of retail businesses in February 2019, as announced by the CEO last week, and more attention to the business blockchain is a strong strategic initiative that could go both ways for management.

While there is a possibility of unexpected gain for existing investors, it also increases the uncertainty around the stock. Aggressive investors, particularly those focusing on blockchain technology, may consider investing in Overstock given the possibility of multiple expansion and four-year management traction in the business with key investments such as tZero and Bitsy. But for the most prudent and risk averse investors, it is best to look at how the blockchain story for the company takes place over the years.

Disclosure: no position.

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