Friday, May 19, 2006

The 800 Pound Hamster


A distant acquaintance at my previous journalistic affiliation, TheStreet.com, has written extensively of late regarding his love affair with the shares of Overstock.com.

His basic thesis, as I understand it, is that the stock is unduly depressed by bearish sentiment generated largely by short-sellers, and that while profitability is currently non-existent, the price-to-sales ratio renders it attractive to patient, long-term investors.

Indeed, by assuming sales growth picks up and margins go from negative to positive over time, this sober, clear-eyed analyst published a $90 price target some weeks back that sent Overstock.com shares flying—just prior to the company reporting lower-than-expected first quarter sales, a larger-than-expected first quarter loss and a relapse in the share price.

Unlike the analyst in question, I have never expressed an opinion about the valuation of Overstock.com and am not about to publish a price target here. Opinions of value, being in the eye of the beholder, hold no interest to me.

What does hold my interest is the thought-process behind those opinions. And in this case, a cornerstone of the Street.com writer's thesis appears to be an analogy between the Overstock.com of today with the Amazon.com of 2000-2002, when the latter was losing money and likewise highly controversial.

In a recent follow-up post, he expanded on this analogy. After walking through the numbers, he catalogued a host of negative comments from various sources during the dark days when Amazon appeared to be in a barrel-roll a little to close to the ground. '
Look at Amazon now,' seems to be the analyst's Overstock rallying cry—'the nattering nabobs of negativism were proven wrong, and the shareholders who stuck it out were richly rewarded.'

Ergo, how can Overstock.com miss?

Having been one of those Amazon nabobs of negativity, I can recall the issue that made me bearish on Amazon shares back in the late stages of the Internet Bubble quite clearly: it was a slowdown in the company’s core book business, masked by new ventures into music, video and international sales, which got my attention.

As I pointed out in at least one piece for TheStreet.com at the time, Amazon’s core book business growth had actually slowed down to brick-and-mortar-type low single digit rates. I believe it even grew less than Sears’ at one point—although this fact was hard to see for all the other “get big fast” non-book projects which inflated Amazon's overall sales growth.

I recall fielding a Silicon Valley-based reporter’s incredulous questions about my analysis one afternoon in early 2000 while fighting off a stomach-clearing flu in bed. This reporter (I believe he was with Business Week) simply could not believe anybody could be negative about Amazon.com. In the patois of the day, he seemed to think I “just didn’t get it.”

Still, while Amazon was a controversial stock and had its share of short-sellers, to the credit of Jeff Bezos he never included me or any other nattering nabob of negativism in a conspiracy theory involving Israeli mobsters and Eliot Spitzer. In fact, Bezos did what great CEOs do when business gets tough: he ignored the shorts and focused on fixing his business.

Sometime after that Business Week conversation, the stock bottomed out in an avalanche of bad numbers and bad press. Momentum investors bailed out when the sales growth slowed, but beneath the sales line, book numbers began to improve and losses began to shrink. I covered my short at $12.50 a share, and wrote about it on TheStreet.com.

The funniest part was getting a call from the same Business Week reporter, who had by then joined the nabobs of negativism and could not believe I was no longer negative on the stock—since everybody by that time knew that the Internet Bubble had burst and Amazon wouldn't make it. Once again, he seemed to think I just "didn't get it."

Amazon did, of course, make it. My only regret about covering my short at $12.50 was, of course, not going long the stock at $12.50.

As for my former acquaintance at Street.com, he may well prove right about Overstock.com—and today’s nattering nabobs of negativism may well be proven wrong. But his survey of bearish commentary on Amazon.com from the dark days of that Internet pioneer left out one particularly negative nabob—not a stock analyst or a hedge fund manager, but the CEO of a company.

In 2004, a Fortune Magazine reporter quoted this CEO saying the following about Amazon.com:


"They don't have a wonderful business, and the stock is way overvalued."

She also reported he called Amazon an “800 pound hamster.”

This was no one-off dissing of Amazon.com: in 2005 this same CEO said he thought Amazon was “the Ottoman Empire of the Internet,” and repeated the "800 pound hamster" crack.

I’m not making that up. Here’s the full paragraph from the January 28, 2005 conference call:


I think that Amazon is the 800-pound hamster. I think that Amazon is the Ottoman Empire of the internet. And it may just drift along as the sick man of Europe for 200 years or one day you may wake up and it's gone. I don't think Blue Nile faces much of a threat from Amazon. I view us as competitive with Blue Nile. I view them much more as a competitor, but I'm not worried about Amazon.

This nattering nabob of negativism’s name?


Patrick M. Byrne, CEO of Overstock.com.



Jeff Matthews
I Am Not Making This Up



© 2006 Jeff Matthews

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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

11 comments:

Jake Wolf said...

A Realmoney.com article on Wednesday cause Overstock to shoot up over 6% and I'll bet if you have enough readers the same may happen today.

Two questions: How much worse can it get over at Overstock and is the world better off without it existing?

Its_strange said...

He is taking Patrick's advice and demanding his shares be delievered. ... He has also become kind of a hero over at Patrick's NCANS website . Backing NCANS , Patrick and thier McCarthyism .......Well i guess its just more american culture

Mark_Leh said...

I've always thought that going long Overstock was roughly equivalent to buying a disability insurance policy on Mr. Byrne. In both cases, if something happens to him, you make a lot of money.

Gnanakan said...

"As for my former acquaintance at Street.com, he may well prove right about Overstock.com—and today’s nattering nabobs of negativism may well be proven wrong."

OK, so you basically admit that you don't know where OSTK is going over the long term. So this becomes yet another post regarding you perseverating thoughts of negativity regarding Mr. Bryne.

No wonder you don't write for TSCM anymore. Who could stand reading story after story that adds no useful information but simply reiterates your dislike for Bryne.

Interesting to know that "All comments must be approved by the blog author." Just as Bryne would like to censor his detractors, you want the ability to censor your blog. You need to consider realize that you are very similar to Mr. Bryne. Maybe that's why you post about him so often???

jucojames said...

Jeff,

I always enjoy your posts and who knows what will eventually happen with Overstock, but I think that you miss a couple of critical points that Alsin addresses. First, there IS an issue with naked short selling of OSTK - period. Whether or not there is a Sith Lord or not doesn't change that. Second, Alsin does a fairly comprehensive valuation-driven analysis of the company and what COULD happen as well as stress the first to market advantage (comparable to Amazon) in its niche. This is also a fact that a wacky CEO doesn't change.

On the bearish side, you have a mountain of concerns about a wacky CEO and what he may be up to with the company given his over the top public comments. I agree that his behavior is far from what I would want out of a CEO, but as far as I know he has done nothing even close to nefarious let alone illegal. Sure, he may be a wack ball, but is that reason enough to assume that valuation and first to market benefits won't win out?

Finally, I also remember you being very bearish on Tyco due to many similar "character" issues surrounding that management. I don't remember whether you were one of the people, but many bears were positive that the books had to be cooked because the CEO was a crook, there were hundreds of acquisitions that could have provided cover for fraud, and their ROE was higher than even GE's. Of course, the management was mostly just guilty of doing the same thing that our Senators do - manipulate their power to enrich themselves at the expense of those they are supposed to serve. Sure they broke the law but their actions didn't critically impair the REAL business values at TYC.

Byrne may very well be mentally ill (I think he is just wacky, extremely intelligent, enjoys winding up all of his adversaries and as with most conspiracy nuts there is some truth to his case) but I don't see how that directly impairs long term enterprise value. Seems to me that a short seller of OSTK better have a psychiatric degree if they expect to gain an edge - otherwise it is pure speculation.

Alex Khenkin said...

jucojames, I have only one question: what is "first to market benefits"? Is IPod the first MP3 player? Was MS DOS the first PC operating system? Is eBay the first online auction house? More often than not the "first to market" is the first to fold while paving the road for competitors.
P.S. Jeff, you should really do away with this moderation stuff - it sucks the wind right out of your blog. IMHO, of course.
Small Investor Chronicles

Its_strange said...

The SEC is looking at accounting issues over at OSTK . How anyone can write postive stories about OSTK's future growth and earnings when some serious people question the past is beyond me.......He even suggests its a 10 bagger.

Jeff Matthews said...

"Gnanakan":

1. I do very much have my own opinion about where OSTK is going in the long term. But I'm not sharing my opinion here.
2. I have never said I "dislike" Patrick Byrne.
3. The only thing I "censor" from commenting here are people who curse. That's why your comment appeared.
4. Gosh, if I am "very similar to Mr. Byrne," as you say, wouldn't I be accusing you of being part of a conspiracy to artificially inflate shares of Overstock and taking orders from the ring-leader, Bob O'Brien, etc etc?

"jucojames": First, there is possibly, as you say, a naked shorting issue with OSTK. But that has nothing to do with anything I wrote about Arne Alsin's recommendation of the stock.

Second, as you say, Alsin did a big analysis comparing OSTK to AMZN, as Patrick Byrne has done on numerous conference calls.

My point was much simpler: Alsin gripes about the bears on Amazon...yet he left out one of the more vocal and public bears on Amazon--Patrick Byrne of Overstock.com.

Now, I'm no professor of logic, but if Arne has a beef with the Amazon bears, and thinks they were short-sighted lightweights...well, how does that square with his recommending shares of a company run by one of thos Amazon bears?

As for Tyco, I'm looking at a chart showing that stock going from $60 in 2001 to $26.72 today. Meanwhile, shares of Danaher, to pick a conglomerate whose CEO was not convicted of grand larceny, did precisely the opposite, rising from the mid-$20s to $62 since that time.

The bears on Tyco were right.

jucojames said...

Thanks for addressing my comment Jeff - I appreciate the honest debate.

I can't argue with anything you state regarding the AMZN/Byrne dichotomy, but I don't see how Byrne's inconsistent public comments necessarily mean that the long term business value is not there. The business may go down in flames, but I don't think it will be because Byrne is a wacko and it seems to me that most bears on the stock focus on him rather than the business itself.

As for the Tyco/OSTK comparison you cite the decline from the peak til today. Well, OSTK is down from $74 to $21, so is it TYC at $26 or TYC at $9? And I seem to remember MANY bears still thumping their chests on TYC when it was in the teens and single digits.

I think Alsin's valuation work suggests that OSTK is cheap IF the CEO isn't a crook and/or doesn't drive the company into the ground. Despite public comments, it appears that Byrne is following a similar path as AMZN - which has been successful. I don't have skin in the game - too much of a battle ground for me. I just find it fascinating how so many people seem to obsess on the CEO and so few discuss arcane things like business models!

javasoy said...

Has everybody commentted here ever read these two books? "Good to Great", and "Dealing with Darwin?" These two books talk about the qualitative side (mostly human side) of companies, and how they evolve. Certainly, apply those theories in these two books would make overstock a very bad investment. I would stay as far away as possible.

given2trade2 said...

Plenty of people have discussed OSTK's business model. The company is worthless if Jack Welch ran it. Once they cut back on Marketing sales will plummet and all that precious "gross profit" byrne talks about will be absorbed by technology and SG&A. There is no business model.