Hey Guys,
I am really wanting to know. Whats going on with Overstock.com, Inc. (NASDAQ:OSTK)? This company has had great revenue growth the past 5 years. They still haven’t yet turned any profit!
I am quite upset about this. This business model should be profitable. They buy merchandise from retailers/other businesses at low costs, hence the “Overstock” name. Which they turn around and sell the merchandise online. Which should be a low costs operating business in itself.
See, Overstock.com is not turning any profits. Due to their high margins on costs. Such as, costs of revenue and their selling,general, & adminstrative expenses. Okay, I understand that the company has to pay bills. I just don’t understand why this company can’t turn a profit. Out of 800 million plus in revenue a year. Is management being payed too much? Do they need to make changes to their infrastructure?
The one thing that gets me thinking and worried. Is every year, their S,G & Adminstrative expenses are always rising just above their Gross Profit. Why is this?
Let’s take a look at their S,G & A expenses at a quarterly time frame. I used MSN Money for ostk’s financial statements here. Looking at 2006 1st Qtr and comparing the expenses to 2005 1st Qtr. In these two different quarters. They earned about the same Gross Profit. You would think the S,G & A expenses would be about the same too. right? Well, guess again. 2006 S,G&A expenses are about 42% higher than 2005’s 1st quarter.
While looking at 2005 4th Qtr compared to 2006 1st quarter. Revenue here is having little effect on their S,G,A expenses.
This alone leads me to believe management is being payed, or paying out too much. Now, don’t get me wrong. This could mean Overstock.com actually has good management, but they are just struggling with expenses. Instead, something deep down tells me to dislike this company. Due to bad management.
Thanks for Visiting
I first start tracking OSTK back in June/July, I did my research and recently I bought a small amount of stock. Since then, the price has went down about 6% and needless to say, I’m upset, but I’ll hold my Overstock shares at least untill the end of the holiday season. I’ll try to explain why.
When I first stumbled at OSTK, the stock in strong short trading and the CEO was going crazy about how SEC should change its rules to enforce a ban on short naked selling. Short naked selling was indeed driving the stock price down, but in my opinion, the CEO should have focused his effords on turning profit instead of chasing short sellers.
Anyways, I saw value in Overstock’s business model, so I decided to see how low will the price go and try to buy at the bottom.
While waiting for the stock to hit bottom (took almost 3 months or so I thought) I did my research on the company. Here is what I found.
Apparently, the company had some technical problems back in December 05 and beginning of 06. Its servers were getting overloaded and thus the website was becomming unreachable.
I also read that a big chunk of Overstock’s expenses were advertisement dollars to drive people to the site (you might have seen their TV ads during the holiday season).
Thirdly, from listening the second quater earnings report, I learned that part of their costs were due to certain items in their inventory that were being returned more and thus driving costs up.
From what I heard in that call, it appeared that the management is working on adressing the technology problem (they are spending a few millions on it) and also building a number of databases to better track their inventories, help them find out which items are returned more (a capacity they did not have before) and eventually find out why are they being returned and address those reasons.
Also the management said, they are not going to carry items that have low profitability and will focuse on the more profitable products.
Around that same time, they also started a bidding service similar to ebay.
I concider all of these good news, however I’m a bit cautious on the progress they are making. The CEO said they are making good progress, but on Moday (10/16/06) around 10am their site became unreachable again, and the average serving time was aroud 61 seconds. Thats probably due to a server going down, not a good thing when you are online retailer.
Also, trying to move on Ebay’s turf is probably not a good idea right now.
Another thing that worries me is what my brother-in-law said about Overstock one time. He considered it “crapy” and said there are better deals at Ebay. He is not technically shaby, but he always tries to get the best deal (and he often does) and if he things that, it is quite likely a lot of other people do too.
However, I’ll stick with this stock for a while. When buying into unprofitable company, you should expect price fluctuations. In the long run, their success depends on having their technology problems sorted out, improving their inventory and cutting cost. It seems all three are in progress, so I’ll wait untill the first few months of 2007 to see how is this technology update playing out.
If overstock improves its Gross Profit margin a bit and reduces its SG&A costs it might actually turn profit someday. I’ll wait and see.