Overstock (BYON -3.52%) shareholders had an awful year last year as the company fell from a $1.8 billion market capitalization to a valuation below $450 million. That slump translates into a 75% stock price decline during a period when the broader market fell by 6%.
Several things have to go dramatically wrong for a business to lose that much value in that short of a time. For Overstock, it took two major catalysts to generate one of the market's worst stock performances in 2018.
Check out the latest Overstock earnings call transcript.
Doubling down and losing big
The chain's e-commerce retailing business struggled mightily last year, and those challenges were compounded by major missteps by the management team. Following a sharp sales decline in fiscal 2017, CEO Patrick Byrne and his team announced a dramatic shift in strategies in mid-March. By sacrificing profits through price cuts and extra advertising spending, they explained, sales trends would spike, and rivals like Wayfair (W -0.02%) would see their market share momentum stall. "We have already turned on the jets," Byrne said in a press release, "and will demonstrate this year that our growth engine is far more efficient."
Image source: Getty Images.
Things didn't turn out that way. Instead, six months later, the company gave up on that strategic shift. As predicted, its profitability dove as the company cut prices and spent more money on marketing. Wayfair's business wasn't hurt by the competitive move, though, and in fact, the home furnishings giant trounced management's forecasts in each of the next two quarterly reports. All Overstock's management succeeded in doing was driving down the value of its retailing business and demonstrating how poorly it stacked up against peers.
Bad timing
Overstock also suffered from poor timing in its pivot toward blockchain and cryptocurrencies, which management has tapped as the key growth driver for the broader business going forward. Executives had been so bullish on the technology that they discussed advancing plans to sell the e-commerce segment of the company and use the cash to fund blockchain initiatives. "When it comes to the world of crypto," Byrne explained in August, "I am well-traveled and can assure [investors] that it is an unusually large, strong group of blockchain talent in and around Medici Ventures," Overstock's blockchain subsidiary.
The next few months brought a collapse in value across many of the most popular cryptocurrencies, though, with Bitcoin slumping over 40% in the final quarter of 2018. Investors reacted to that drop by pushing shares of Overstock lower, too, since so much of its value and its earnings potential is now tied to that volatile tech niche.
Looking forward
Overstock is still apparently planning to sell its retailing business to focus on blockchain technology in an announcement that might come before the company announces its holiday-season sales results in the coming weeks. There's no telling whether the sale will actually happen, though, and at what price management might achieve. Thus, investors should be extra cautious about considering starting a position in this stock today, even at this low price.
The questions only get bigger looking further out to a future in which Overstock operates solely as a blockchain technology innovator. It's far from certain that the company can generate sustainable profits under that operating model, and recent blunders don't exactly inspire lots of confidence in the management team. As a result, investors are better off watching this volatile stock from the sidelines in 2019.
