Following a brutal 2018 that reduced its market value by about 75%, Overstock (NASDAQ: OSTK) is enjoying a sharp rebound right now. The e-commerce and cryptocurrency specialist's shares are outpacing the market by a wide margin so far in 2019, up about 60%.
Investors are growing more optimistic that the business could gain value as it develops its blockchain platforms and stabilizes its e-commerce division in preparation for a potential sale. That improving investor attitude raises the bar for Overstock to show progress along these initiatives when it reports fiscal fourth-quarter results before the market opens on Monday, March 18.
Let's take a closer look.
A tale of two businesses
Overstock's current setup is an odd union of two vastly different businesses. Management is most excited about its blockchain technology partnerships, so the company's latest initiatives involve pouring resources into that field. Yet nearly all of Overstock's revenue is produced within its e-commerce business, which markets home furnishing products. As a result, this division will take center stage on Monday.
The e-commerce unit shed market share in the latest quarter and throughout most of 2018. Its 4% sales growth rate lagged far behind rival Wayfair, which expanded at an over 40% pace in its fiscal third quarter. That gap isn't likely to improve much over the holiday quarter, for two reasons.
First, Overstock scaled back on its marketing and advertising spending due to management's decision to protect profitability over market share. This shift helped cut losses in half last quarter while depressing growth, and CEO Patrick Byrne and his team said in early November that investors can expect to see more of the same over the holiday selling period.
Second, Wayfair appears to have soaked up more market share from Overstock and other rivals. The e-commerce giant in late February announced soaring sales gains over the holidays as its U.S. customer base shot higher. Meanwhile, Wayfair's success has convinced its management team to keep the accelerator pressed on their growth investments, so Overstock may soon face even more competition that will make profitability harder to achieve.
Blockchain updates and looking ahead to 2019
Overstock executives should have more positive news to report on the cryptocurrency side of the business. The company will likely trumpet recent successes by its blockchain subsidiary, Medici Ventures, in moving its technology deeper into all aspects of payment exchanges. In December, for example, Overstock secured a deal to help a Wyoming county overhaul its platform for tracking land records. If this project succeeds, it would establish yet another way for Medici Ventures to monetize its intellectual property in the emerging blockchain industry.
Stepping back, both of Overstock's business segments lost money in 2017, and sales declined by 3% in that fiscal year. For the year that's about to close, most investors who follow the stock are predicting a slight sales rebound and continuing losses.
Yes, shares could spike on news that the company has made major progress in its blockchain partnerships or has found a buyer for its e-commerce division. However, the stock's slump in the past year reflects the serious risks that shareholders face with a business that's about to post its second straight year of operating losses. Until that earnings trend begins reversing itself in a sustainable way, investors might want to watch this stock from the sidelines.
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