Description

Overstock.com (Ticker: OSTK) is a polarizing situation characterized by fatigued long investors and emboldened short investors who are sitting on material gains. Clearly looking at the recent performance of the common stock, the shorts hold the microphone. That said, we believe the narrative may be ready to inflect.

We believe OSTK exhibits a compelling reward vs risk profile over the next 6-9 months, and more likely to hold the shares for longer duration.

Reasons the Overstock.com short thesis has worked and shorts have held the microphone:

• Management’s track record of achieving revenue and profitability targets has been uneven
• Amazon and Wayfair are eating Overstock’s “lunch”
• Increasing brick-and-mortar / omni-channel retail competition (Walmart / Jet.com)
• Business model change: value to growth to gain market share, which will require material investment
• Related party transactions involving family members of the CEO lending money to the company
• Blockchain / cryptocurrency use cases have thus far been more hype than substance
• SEC rule-making has yet to provide sufficient clarity regarding ICO (initial coin offering) capital raising
• Supreme court e-commerce sales tax ruling removes an overhang but creates uncertainty around current liabilities
• Unlikely that Overstock reaches $250MM tZERO security token offering (STO) goal https://www.sec.gov/Archives/edgar/data/1130713/000110465918013731/a18-7242_1ex99d1.htm - new information would indicate interest is high and ~$320 million
• tZero’s alternative trading system (ATS) unlikely to be widely adopted by large financial institutions
• Failed opportunistic capital raise (warrant issuance)
• Investors reacting negatively to insider selling (despite established 10b plan structures in place)
• Engagement of a lower tier investment advisory firm to evaluate strategic alternatives
• Strategic alternatives process unlikely to lead to partial or full monetization of Overstock’s e-commerce business
• Correlation with crypto currency

What are you Paying for Today?

• ~$2Bn in annual revenue e-commerce business * ~0.35x multiple = ~$22.00 per share
• $220MM net cash = ~$7.50 per share (working capital adjustment lowers balance)
• Discounted e-commerce valuation + net cash = current share price of ~$29.50

Other Considerations:

• What If…Overstock’s blockchain subsidiary tZERO closes its security token offering (STO) and meets the fundraising goal of $250MM. $250MM * 80% Overstock ownership of tZERO = ~$6.75 per share (https://www.tzero.com/tzero-overview.pdf). As mentioned above, the STO is likely to raise ~$320mm, and have until August 6^th to secure the new LOI as well as additional capital = ~$8.85 per share
• What If…following the security token offering, Overstock sells a minority stake in tZERO and retains control of at least 50.1% ownership (we believe tZero is worth $2 billion post money valuation = ~$41 per share) as telegraphed by management on various earnings calls creating a positive valuation “mark”. Overstock tZERO carrying value (inclusive of cash raised from minority sale) assuming a 10-20% illiquidity discount for remaining ownership = ~$27.50 per share
• What If…a successful tZERO security token offering and / or minority sale results in positive fundraising momentum for Overstock’s remaining blockchain portfolio under the company’s Medici Ventures’ umbrella= ~$1.00+ per share (cost method). Overstock’s other blockchain businesses include but are not limited to:
• DeSoto Inc: provider of real estate records of ownership utilizing blockchain technology in developing countries
• Bitt Inc: provider of digital currency transfer and payment services in the Caribbean
• Voatz: local election voting and citizen engagement mobile platform
• What If…Overstock concludes its strategic review that results in the sale / spin / merger of its e-commerce business for 0.60x revenue. $2.0Bn in revenue * ~0.6x multiple = ~$37.00 per share
• Security token offering + tZERO minority sale / valuation mark + other blockchain capital raises + retail sale / spin / merger + net cash = 2.5-3.0x+ MoM vs current trading range

We believe Overstock has clearly been a great alpha short in 2018. However, the market is currently not ascribing any upside value to Overstock’s multiple “shots on goal”, which could result in a return of multiples on invested capital.

If the stock continues its downdraft back to summer 2017 levels, risk is nearly 50%. However, if Overstock is able to complete its capital raise in August via a successful tZero offering as well as bring on new strategic/anchor investors into tZero, OSTK, as well as well as other parts of Medici, this should give the short thesis pause. Risk at this level is more technical (daily vol is extreme) than fundamental and patience over the next 6-9 months will likely be rewarded with minimal loss of capital. We can envision various scenarios and payoffs, where the shares are worth $75-$350 per share and are sized for a volatile ride. We will use the message posts for further updates, issue spotting, valuation exercise and more. 

Catalyst

-tZero STO capital raise

-Additional "Strategic" investment in various Blockchain STO offerings

-Potential for a new anchor investor adds credibility (investor in tzero, Medici and Overstock all on the table) and could expand their global reach via partnerships across payments

-Separation/monetization of E-commerce unit

-Once separation occurs or is better telegraphed, new sell-side coverage initiation

-Breakdown in correlation of stock with cyrpto eco-system

*We will use the message posts for further updates, ongoing issue spotting, valuation exercise, and more.