Friday night, Overstock.com (Nasdaq: OSTK) announced plans to sell 1.5 million shares under a 2.5 million-share shelf registration filed back in February. The stock, which had about tripled off its Oct. 2003 low of $12.84, closed down 10% at $32.78, after bottoming at $29.81 earlier in the day. The thing is, the share offering shouldn't have surprised anybody.
In the first-quarter letter to shareholders dated April 22, Overstock President Patrick Byrne discussed the volatile nature of the company's cash balance due to the cash-to-inventory-to-cash cycle of the business:
In theory, our current cash will suffice to handle this year's September-October inventory build, even assuming our present high rate of growth continues. However, that would necessitate running cash uncomfortably low just before the holidays. In addition [to a $20 million credit line with an affiliate of Wells Fargo (NYSE: WFC)], our shelf filing was declared effective by the SEC in March, so we can issue stock if we decide we need more capital and the environment is right.
In other words, we were told this was coming -- and why.
Basically, the cash will act as a safety net as the business grows. In the fourth-quarter letter to shareholders, Byrne noted that, despite closing the quarter at $40.3 million, the cash balance had hit a nadir during the quarter of $9.7 million. Compared to that, the $50 million or so in proceeds from the share offering is a significant amount of cash to help ensure that Overstock has enough to fund inventory growth without cutting it too close.
Of course, a stock's valuation is called into question whenever a company raises cash by issuing stock following a huge run-up. That's especially true when the whole sector -- including eBay (Nasdaq: EBAY) and Yahoo! (Nasdaq: YHOO) has performed similarly.
As for whether Overstock is undervalued or just cheaper than Amazon.com (Nasdaq: AMZN), the debate rages on. Either way, it's better to raise money at $30 a share than at $10, right? Or maybe that's just the shareholder in me talking.
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Fool contributor Jeff Hwang owns shares of both Overstock.com and eBay.
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