Tuesday, July 12, 2005

Overstock Cruises in With a Cool 14

My high school French teacher was a hip young guy, kind of scruffy, who related more to us freshman than he did to the other teachers in school. He seemed especially fond of Billy, the class member who—this was a point in time when Led Zeppelin and Alice Cooper were the biggest bands in my school—was a Dead Head.

Billy was not, as they say, always entirely with us even when he was with us—if you catch my drift.

In any event, I couldn’t tell you a thing the French teacher taught us that year, but I do remember very vividly the day he gave us our grade point average just prior to going into final exams.

He did it in front of the whole class—sitting on his desk and reading our approximate GPA out loud from a sheet of paper. He read the list slowly and with great relish, especially when he got to the various knuckleheads among us. I think his point was to let the laggards know how well we had to do on the final in order to pass.

The girls, of course, were all fine—80’s and 90’s and all that. The boys’ grades had a much higher standard deviation, as it were: mostly 70's and low-80's, with a couple of 60s in there. Then he got to the Dead Head:

“And Billy’s cruising in with a cooooooool 20,” is how he put it. Everybody laughed, including Billy.

I think of Billy when I look at the Overstock.com “Build Your Own Jewelry” site and monitor the diamond sales.

You remember “Build Your Own Jewelry”—the web site that was going to “dominate” the $2,500 to $5,000 engagement ring market, according to blustery Overstock CEO Patrick Byrne.

And, of course, you recall the $7.5 million diamond “steal of a lifetime” Patrick made to stock the site on the spur of the moment in late 2004 with some unidentified partners in an off-balance sheet vehicle established months prior to the sudden transaction with desperate diamond sellers who apparently didn’t know the value of their satchel of stones…which he could “flip” for an immediate $1 million profit or “dribble out” via the web site for a $3 million profit...

Well, the dribbling is not happening, according to my monitoring of Overstock.com.

Since the 38 diamonds disappeared en masse the first week of April (see “The Mystery of the 38 Diamonds” on this blog), out of nearly 2,800 stones available to all comers on the “Build Your Own Jewelry” site, a cooooooooool 14 stones dribbled out during the remainder of the second quarter.

And only 3 of those 14 were priced above $2,500—the price point at which Overstock was going to begin its “domination” of the online jewelry business.

No doubt in the upcoming second quarter conference call, Patrick will shine the spotlight on something besides “Build Your Own Jewelry.” I have no idea what, because the auction site is not happening, and the company was barely mentioned in last month's Wall Street Journal article on eBay's problems (Amazon ranked more highly as an eBay competitor)...but diverting attention away from the losers is Patrick’s standard M.O. and it seems to work well with Wall Street’s Finest.

For unlike my French teacher, who publicly shared the failings of poor Billy, the Dead-Head underachiever, with the rest of his classmates, there’s apparently nobody willing to discuss Patrick’s failing grades in front of the class.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Tom said...

Hi Jeff,

I'm not so sure that words like "faltering", "failing", and "not happening" apply to Overstock Auctions.

Check out these two graphs. Note the sharp uptrend in Overstock Auction counts in recent months, coupled with corresponding flatness/decline for Ebay Auction counts.



To say now that "Auction count numbers don't matter" would be disingenuous, since you held up those same numbers as important when they temporarily blipped downward earlier this year.

To say "so what, eBay still has nearly 75-100 times the number of Overstock listings" has some merit. However, it looks to me like Overstock Auctions has a very real chance to reach and maintain critical mass. If that happens, OSTK's market cap is unlikely to remain at 1/57 that of EBAY, and current Overstock shorts are unlikely to be very happy.


Its_strange said...

since we don't see a dribble will we see that flip for a $1,000,000 profit occur ? If not, why not

Jeff Matthews said...

"mw blogger": yes, the chart showing listings on Overstock Auctions is very impressive, and it fools a lot of Overstock watchers.

For one thing, the Overstock listings count spikes whenever the company offers half-price listings or free listings, as Patrick himself has noted on past conference calls, so you really have to know what they are doing to get those listings to be able to say how impressive they really are.

For another, you have to look at how many bidders are buying on Overstock--this is why the Amazon auction site scored better than Overstock in the Wall Street Journal story on eBay's problems: Amazon had more bidders.

One way to check the active bidding is to look at how many items have bids, how many have multiple bids, and what portion of the items offered are actually purchased ("the close rate.")

In the Art category, for example, Overstock offers 77,313 auctions.

Only 14 of the 77,313 have more than 1 bid. Only 50 of the 77,313 have any bid at all.

That's what I mean by "failure," and it is a failure any way you want to rationalize it.

The purest measure of any online auction is the "close" rate, which Patrick, in the early days, used to brag was higher than eBay's--I believe he used to hint it was somewhere in the 40% range...meaning 40% of all auction closed with a successful transaction.

Well, if you take the time to look at the 300 art-related items (out of 77,313 offered) whose auction expires in the next hour, there is only 1 item with a bid, and it only has 1 bidder.

That's a close rate of something less than 1/300th...which is not 40%, or 30%, or even 5% or even 1%. It's a close rate of less than 1%

And that is why words like "faltering" and "failing" and "not happening" apply to Overstock Auctions.

Merely looking at a chart of listings on an auction site is like looking at all the junk being offered at a flee market without counting 1) the customers browsing and 2) the checkout lines.

Overstock Auctions is not happening.

bsilly said...

Have you ever run a business? You're grading these projects in less than 12 months. You expect instant blockbuster success, that seems a little rediculous to me. Most successful businesses and projects are not overnight successes, they take time. You gotta be more realistic and objective before you start throwin the tomatoes in my opinion.


Lyrical said...

Hi Jeff-

Great stuff. Don't forget btw that only one seller - adamhershauctions - has 100,000 of the 250,000 listings on Overstock (just search for the seller name on the Overstock site). This one seller accounts for the entire growth of the auction site. On top of it all his sell-through is horrible...

Its_strange said...

UBid is getting into the online jewelry business as well. Story in Investor's Business Daily

The Unknown Broker said...

Excellent point "Lyrical."

And while I have no proof of this, I strongly suspect that this one seller with 100,000 auction listings (adamherschauctions)did not pay any fee for the listings.
Why do I believe this is likely?

1. As we know Patrick and the gang are not averse to giving away listing space (see Jeff's comments) to beef up auction activity.

2. Why on earth would one seller pay a listing fee times 100,000 when the sell-through -- and even any bidding at all -- have been so incredibly low? Any rational seller would list some, see how they went, and as success (or lack thereof) was manifested, make a determination as to listing in size.

On the other hand,if Overstock said to him "We'll give you 100,000 slots for free (or close to it)" while they were saying to themselves "Woo-hoo! Watch our auction count skyrocket off of this deal and just think how our loyal Overstockians will love that number!" ... well, a great no-risk deal for adamherschauctions and an appparent success for Overstock. At least until you look under the hood a little and find out it's all fog and looking glasses.

Again, just my theory, but I think it makes some sense.

Gnanakan said...

Hey Jeff,

What do you think of the extremely high short interest in the stock. Looks to be over 50% of the float. Over the very long term it is not a big factor, but it looks like there's too many shares lent out and that could make for some painful spikes for the shorts, or even prevent the stock from really dropping.

exFinancier said...

i heard that jewel shops are more cheap than offline, is it true ?