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So, How is OSTK Doing?

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By Smokeater233
July 21, 2003

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We're just two weeks away from OSTK announcing Q2 earnings - anyone have any thoughts prior to the release?

OSTK currently trades at $12.99 (down a penny from the IPO price) - this after some serious roller coaster rides that saw double-digit rise and falls over the past week.

Looking at Q1 and considering some of the news in Q2 I think we might be in for a pleasant surprise. OSTK in Q1 announced revenue of $29.2M - equaling 142% in revenue growth as compared to the same quarter a year earlier. Yet we were looking at a EPS loss of about $-0.26. But in the same quarter a year earlier OSTK reported EPS losses of $-0.87. That's somewhat reminiscent of Amazon. We should be expecting an EPS loss of $-0.06 this quarter and an EPS gain of $0.02 by the year's end. Not very flattering, but again - this is very reminiscent of the old Internet stocks boom and they are showing EPS growth year over year.

But, that said, I'm convinced that OSTK will at least be making earnings this quarter, if not beating them by a penny or two.

Consider the following issues:
1. OSTK in April settled the advertising suit with Microsoft. While we don't know what the settlement amount was, we know it was big. That said, Jonathan Johnson, general counsel for OSTK had this to say, "Although the settlement amount was substantial, it was not material to the company's liquidity and will not affect the future prospects of the company. We're glad to have the matter behind us."

2. Jason Lindsay, who was CFO for OSTK until late April, also became president of OSTK. What does that mean? Maybe not very much at all, but I like the fact that the CFO can manage the business on paper and then implement his actions as President. I think it's the management "best of both world's" with Byrne still acting as Chairman and CEO.

3. Then on May 20, OSTK began shipping to 35 countries - this can only be good. The more countries a company ships to the more sales you can secure. And just about two three weeks later OSTK announced that it sold one million books, CDs and movies since launching this category. At the same time they noted they had more than 200,000 books priced at least 20% cheaper than Amazon.

4. And finally, just a few short weeks ago Palm and OSTK formed a relationship (which initially at least sent the share price through the roof). Now it's not entirely clear how far the relationship will go - but Palm is officially using OSTK to sell its open box and customer returned products. It's also not clear how many open box and customer returned products Palm deals with. However the prices of OSTK's returned Palms do fall somewhere in between the array that Amazon offers (the prices of Amazon's used Palms fall into something of a broad range). OSTK does offer some of the latest Palms on the market at very affordable prices. OSTK ships their used Palms worldwide, Amazon only ships them in the continental US. OSTK also offers guarantees for the used Palms (albeit short ones) and I don't believe Amazon offers any guarantees for its used Palms.

5. Inventories - something with retailers I like to watch closely - has been growing at about 2 million quarter over quarter - although I think it's manageable, particularly considering that sales are growing by much more than 5 million quarter over quarter - and profitability on those sales remain strong.

6. OSTK continued to post net income losses in Q1 of this year, but they are decreasing and could in fact post a net income gain in a year or so if they continue at this rate - and they still have NO debt.

ON THE OTHER HAND

7. OSTK's free cash flow is zilch and that is of great concern to me.

8. I'm not very clear on their new marketing strategy - but that also is of great concern to me. They appear to have gone from marketing the company using the wrong mediums or targeting the wrong places to nothing at all. In speaking with Kathryn Huang, treasurer at OSTK, in June, she had this to say. "We continually monitor and assess the effectiveness of our online advertising strategy. In the past quarter, we have restructured our marketing strategy and continue to move forward with what works and let-go of what does not work. This is an area that we will continue to focus on to achieve growth and profitability for OSTK." In other words, we haven't quite figured out what direction to take...

9. The website does appear to be very low budget (not very eye-catching at all - and no customization like you'd find on Amazon or other comparable websites). While it's not a very big deal - it doesn't keep me coming back.

10. The prices. I've heard a lot of Fools saying they've found better prices elsewhere. But there have been others that have said that the prices are, at the very least, reasonable and that dealing with Overstock.com has been flawless.

So...that's my current take on OSTK. We'll find out after market close on July 30 where we really stand...until then...

Let's hear your thoughts,

-Jess


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