Novice Investing - Overstock, The Next Amazon? Not Yet

Date: Sunday 20th 2008f July 2008 12:42:03 PM

Overstock, The Next Amazon? Not Yet - 11/16/2006

By: Novice Investing Staff

Overstock.com Inc. (OSTK) has been touted the next Amazon. (AMZN) on a few ocassions for the past few years. The company philosophy was to buy out of date inventory at a steep discount from manufacturers and then resell it at a low price to consumers.



As seen from the screenshot above, Overstock is pretty agressive in promoting its products to visitors. On the top, you can visibly see the $ 1 flat rate shipping. If you compare it with the much-hyped Amazon Prime, this costs even a lot less. Amazon prime costs $ 79 per year. Thus, you need to shop 79 times at Overstock to get the same benefit as Amazon Prime. Did you shop 79 times a year? If you do, congratulations. You are one of the shop addicts. For most of us, perhaps 20-30 times shopping online in one year is already a tremendously expensive proposition financially.

While it is not visibly clear, when you visit Overstock, your browser will show at the top that 'save up to 80% every day' at Overstock. Overstock might not be comparing itself with Amazon but in the past, when you browse one item (say a Peter Lynch book), Overstock will display their price and Amazon's for comparison purpose. Overstock also has the same breadth of products offering as Amazon. Clearly, it is looking up at Amazon as competitors.

Meanwhile, Overstock is still in the red, financially. For the year ending on December 31st, 2005, Overstock incurred a $ 25 Million of net loss with revenue of $ 803.8 Million. Hey, Amazon was incurring losses during its early period of domination. Look at where they are now. For comparison purpose, Amazon reported revenue of $ 2.76 Billion with a net loss of $ 1.41 Billion in year 2000. What? In fact, operating loss for Amazon at the time was $ 863 Million. Compare that with Overstock's $ 23.7 Million of operating loss.

Shares of Overstock has been hammered to $ 13.82 per share or $ 283 Million in market capitalization in recent weeks. This was due to weak third quarter earning report where Overstock reported a 6% year over year drop in revenue to $ 159 Million. Amazon never reported a year over year drop in revenue during its short existence. Meanwhile, shares of Amazon had rebounded from $ 8 to $ 42 now since that one billion loss was incurred. As for Overstock, this year losses might reach $ 65 Million this fiscal year if things doesn't improve. Comparing net loss over revenue, this is not as bad as Amazon's one billion loss. However, the problem is Overstock's cash cushion. Latest balance sheet shows that Overstock has a 'mere' 39.3 Million in cash. During Amazon's darkest day, the company had $ 1 Billion in warchest. True, debt was much higher. However, that debt wasn't due in another 20 years or so, safe enough for Amazon to focus on its business.

While Overstock's one bad quarter does not seal its fate, the company has less cushion to work with to convince investors. If business continues to deteriorate this coming holiday season, you can see Overstock screaming for help. Share price would probably trade in the single digits. Amazon had fared much worse during its darkest day. It survived and shareholders were rewarded with a 600% gain on its stock price. If you have so much faith on Overstock's resurgence, current situation is a very good time to accumulate position. Just don't be surprised of the stock's volatility in the coming years.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Overstock.com Inc. (OSTK) or any other securities.

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