Overstock.com (NASDAQ:OSTK) CEO Patrick Byrne has become an increasingly controversial figure of late, engaged as he is in a well-documented public battle against a group of short sellers who have allegedly conspired to coordinate an illegal attack to drive down Overstock's stock price. But even if you think Byrne has lost his marbles, he is clearly a brilliant, value-minded, shareholder-friendly manager with an enviable pedigree. And conspiracy theories aside, the bull case for this Motley Fool Rule Breakers selection's future here is about the big picture.
The bottom line is that Overstock.com is an effectively profitable business, with revenues still growing at a rapid pace -- up 83% over the past four quarters to $641.2 million. Meanwhile, profits are expected to scale beginning next year as gross profits grow faster than general and administrative expenses.
While investing in its growth, the online closeout retailer has posted a nominal GAAP loss of $7.2 million over the past four quarters, after losing $11.3 million over the previous four quarters. And even after spending $92 million in cash during the second quarter on convertible debt and stock repurchases and another $25 million in closing the Ski Westacquisition on July 1, the company still began the quarter with more than $100 million in cash on the balance sheet.
The stock isn't going to zero. And as the business grows and profits start to kick in, the upside is intriguing.
Lofty goals and upside
Management has targeted fiscal 2006 revenues around $1.5 billion at a net margin approaching 1%, with $2 billion plus in revenues in 2007 and net margins in the 3%-5% range. Do the math, and that translates into earnings of about $0.75 per share in 2006 and earnings in a range of $3-$5 per share in 2007.
Those figures may be a little optimistic, as revenue growth slowed to 72% in the second quarter because of a sluggish start in April and customer acquisition cost was up 39% over last year's second quarter. Gross profit per transaction did climb 44%, however. Meanwhile, the company spent another $1.2 million during the quarter running its auction business in what could be a futile attempt to chip away at Motley Fool Stock Advisor pick eBay (NASDAQ:EBAY).
But if the company returns to 80% growth in Q3 and Q4, the company will reach its goal of $900 million in revenues for fiscal 2005, with growth slowing to 66% in 2006 and 33% in 2007 to reach the $2 billion revenue mark.
Ultimately, the reported earnings figures will also depend largely on the amount of the company's earnings power that management decides to invest in Overstock's growth (i.e., higher marketing expense means faster growth but smaller near-term profits). But if the company does in fact have $2 billion plus in annual revenues with earnings power of $3-$5 per share by even 2008 or 2009 and the company is still growing at a projected 25% annual clip, the stock will look like a bargain at today's price of around $40 per share.
Management and share buybacks
We've mentioned CEO Patrick Bryne's pedigree on a number of occasions. Byrne's father is former GEICO chief and insurance industry legend Jack Byrne, the man who is credited for saving the Berkshire Hathaway (NYSE:BRKa) (NYSE:BRKb) subsidiary from the brink of disaster back in the 1970s. Berkshire CEO Warren Buffett, a longtime friend of the elder Byrne, also served as Patrick's mentor. In fact, in 1998, Buffett brought Patrick in as temporary CEO of uniform manufacturer and Berkshire subsidiary Fechheimer Brothers.
So while there is the notion that Byrne may just be upset about his company's stock price falling from its highs above $77 and is looking for someone to blame (i.e., short sellers), I don't think that could be further from the truth. By close association, by his words, and by his own actions, Byrne is not the type of person to give a lick about the mere price movement of his stock.
Because if nothing else, Byrne has been opportunistic with the recent fall in stock price.
During the second quarter, Overstock bought back 1.7 million shares -- 8% of outstanding shares -- for $64 million at an average of $38.25 per share. And once Byrne was done buying back shares for the company, he spent almost $2.2 million buying 50,000 shares for himself. That follows personal share purchases of $1 million earlier this year, a $13 million purchase in February 2004, and a $3 million purchase in August of 2003.
More bull than bear
As investors, we can certainly do without the distractions. And with the Aug. 11 lawsuit against Rocker Partners and research firm Gradient Analytics, Byrne has theoretically turned over the business of fighting short sellers to lawyers. Hopefully, this turns out to be the case. In addition, Byrne has indicated that he will move to install Jack Byrne as chairman, leaving himself more time to tend to his duties as CEO.
Overstock.com may not be a "buy" for everybody, but with the CEO buying shares like mad and a potentially wonderful business "at the point of scale," I am certainly more bull than bear.
You're not done. This is just one part of a four-part Duel! Don't miss John Reeves' bear argument and bear rebuttal, and then check out Jeff's bullish rebuttal.
When you're done, you're still not done. You can vote and let us know who you think won this Duel. Overstock.com was recommended last year in our Rule Breakers newsletter service. eBay is a Motley Fool Stock Advisor pick. Try a 30-day free trial to Rule Breakers by clicking here. For a free trial to Stock Advisor, clickhere.
Fool contributor Jeff Hwang owns shares of Overstock.com, eBay, and Berkshire Hathaway. The Motley Fool has an ironclad disclosure policy.
