Dueling Fools: Overstock.com Bear

I have a confession to make: I am the Sith Lord that Patrick Byrne has cited as the mastermind of the plot to destroy Overstock.com (Nasdaq: OSTK  ) . I am finally ready to reveal myself and to challenge St. Patrick directly. With the power of Skeletor and all the forces of darkness (a.k.a. short sellers) behind me, I shall destroy him and the greatest company in the history of the universe, Overstock.com.

OK, so that may not exactly be true. But I do share the same beliefs as that Sith Lord who exists only in Patrick Byrne's less lucid hallucinations. There are two simple reasons why Overstock.com is the quintessential bad investment: Its CEO is not focused on his job, and it is a second-rate business in an industry where only a few big companies can survive.

One of the reasons so many people love to hate Overstock.com is that its CEO, Patrick Byrne, seems to care more about advancing his conspiracy theories than about running his company. He has railed against short sellers for years, and he has been particularly critical of naked short sellers.

While I'm not an advocate of naked short selling, Byrne and his followers use it as a scapegoat for everything bad that happens to Overstock.com. It may surprise Byrne's followers and even some Fools, but most of the people in the world -- and most of Overstock's customers -- do not give half a hoot about short sellers, Byrne, or Sith Lords.

It is therefore hard for me to believe that short sellers are somehow causing Overstock's revenue to stagnate. Revenue for the first nine months of the year fell 5% from 2006 levels, and revenue in the "great" third quarter was up only 3% year over year. Stagnant revenue and a continuing lack of profits reveal Overstock.com for the poor business it is. Despite its dot-com name, it has more similarities to Montgomery Ward than to Amazon.com's (Nasdaq: AMZN  ) successful business.

Online retailing is perhaps even more cutthroat than bricks-and-mortar retailing. Unless Overstock.com offers a truly unique experience, there is no reason why its customers won't click elsewhere. Its competition is intense; besides Amazon.com and Red Envelope (Nasdaq: REDE  ) , it also faces specialized online retailers like Buy.com and Newegg.com, not to mention traditional discount retailers like Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) that also offer their products online.

Evidently, Overstock's potential customers agree with me that there's little point in shopping there. The company has had to discount heavily and use sales promotions in the fourth quarter, resulting in what Byrne predicts will be lower gross margins. While bulls might point to the anticipated 10% rise in gross bookings this quarter, it is hard to get excited about revenue gains disguised with faltering margins.

Wait! You're not done yet. Go back and read the rest of this Duel, then vote for the winner.


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