Is George Soros Right about Overstock.com?

Hedge fund legend George Soros is bargain hunting in Wall Street’s retail junk heap again. This time he is buying into Overstock.com (NASDAQ: OTSK) a discounter that functions as an online bargain basement.

Soros and his Quantum Fund have sunk $100 million into Overstock because he thinks it can generate extra revenue by accepting Bitcoin (BTC) and other cryptocurrency payments, Valuewalk reported. Not coincidently, Soros Fund Management reportedly has plans to start cryptocurrency trading.

Soros’ track record in retail is dismal, back in 2013 and 2014 he bought around 19.98 million shares of zombie department store JC Penney (NYSE: JCP), Reuters reported. The billionaire sold all of his JCP shares less than a year later after taking a bath. JC Penney shares were trading at $3.47 on 11 April 2019.

Overstock ICO under Review by SEC

Soros is not buying into Overstock’s tZERO Security Token instead he is buying the company’s stock.

Overstock itself is investing around $30 million in tZERO initial cryptocurrency offering (ICO), Valuewalk reported. tZERO is being sold through private placement through 14 May 2018. The company is trying to sell $250 million worth of tZERO tokens.

tZERO is described as an effort to build a “front-end trading system” designed to reduce settlement costs and make auditing easier. The company is trying to build a distributed-ledger platform marketplace for accounts receivable; which would be lucrative if it works.

There are many drawbacks to that plan including legality, scalability, and liquidity. Legality is the greatest roadblock because the tTZERO ICO is already under review by the Securities and Exchange Commission (SEC), Coindesk reported. The Commission’s regulators think Overstock is trying to do an end run around investment regulations via the ICO.

“The SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not mean that the SEC has concluded that anyone has violated the law,” an SEC press release about Overstock reads.

Will Overstock’s tZERO Platform Work?

There are serious questions about whether the tZERO platform would work. Overstock already switched platforms from SaftLaunch to StartEngine; because of concerns about anti-money laundering (AML) and know your customer (KYC) law compliance, Coindesk noted.

A greater problem would be scalability present-day blockchain technologies might not be capable of handling enough transactions to make something like tZERO profitable. The Ethereum blockchain reportedly can only process less than 20 transactions a second and Bitcoin-based solutions can only handle less than 10.

Unless tZERO can scale up to process at least 200 to 300 transactions it would not be profitable. Technically the only way to do that with present technology would be to move off the blockchain and onto a sidechain like the Lightning Network. The blockchain simply lacks the capacity for high volume processing, a sidechain is a larger chain that operates outside the blockchain network.

Another concern is liquidity the ability to get cash quickly from transactions. Many altcoins lack liquidity because they cannot be quickly converted or sold. tZERO would have to solve the liquidity problem if wanted to create a token that can be sold on the capital markets.

Will tZERO be a Good Investment?

Smart tokens like Bancor (BNT) offer a potential solution to the liquidity problem by creating tokens that can be converted fast with the Bancor Protocol. This might help tZERO which seems to be an effort to borrow money against invoices, in other words factoring. In factoring unpaid invoices are used as collateral usually for high-interest loans.

tZERO will need something like the Bancor Protocol to work because it appears to be an effort for Overstock to raise money from the capital markets. This might be why the SEC is concerned; tZERO is trying to issue the blockchain equivalent of junk bonds to finance Overstock’s questionable business.

That will make tZERO an incredibly risky investment because it will try to make money by issuing high-interest collateral loans to shaky businesses via the blockchain. Nobody knows if that business model is viable or if it will even work. As I noted above the technology to do it might not exist.

Is Overstock Making Money?

The whole tZERO proposition might make sense if Overstock.com were actually making money. Stockrow.com data indicates the company is losing money right now.

Overstock.com reported a loss of -$95.69 million instead of a net income and an operating loss of -$22.17 for 4^th Quarter 2017. Those losses were compounded by a -13.28% drop in year to year revenue growth during a period that covered the Christmas shopping season.

Overstock’s revenues dropped from $526.18 million in 4^th Quarter 2016 to $456.29 million in 4^th Quarter 2017. That indicates Ovestock.com simply cannot compete with better-capitalized competitors like Walmart (NYSE: COM) and Amazon (NASDAQ: AMZN).

Overstock did end up with a little cash in the form of $24.26 million in free cash flow and $27.33 million in operating cash flow at the end of 4^th Quarter 2017. That gave the company $203.67 million in cash and short-term investments and $433.82 million in assets at the end of the 4^th Quarter.

It looks as if Overstock is simply not making enough money to keep up with Amazon. It is no longer a profitable niche retailer, so management is looking for a new business to generate extra cash. They’re hoping to trick investors into financing their scheme.

What does Uncle George see in Overstock.com?

So why did Soros buy Overstock? My guess is that Uncle George sees an opportunity to make a fast killing by selling it while it is high. Overstock was trading at a ridiculous $37.30 a share on  18 April 2018; that was less than half the imbecilic $79.70 a share it hit on 10 January 2018.

Both those prices are far too high because there is nothing in Overstock’s financials that justifies the $36.80 a price, this stock should be trading at less than $10 a share. Overstock is worse than J.C. Penney which has quite a bit of real estate that can be sold or leased to generate some cash. At the end of the day, all Overstock has is a website and a couple of fulfillment centers.

Investors should stay far away from both Overstock and tZERO. George Soros might be in a position to make money from them but you will not.

Big-money investors like Soros can make money by rummaging around in the Wall Street garbage dumpster. Average people with modest means cannot, and should not try to follow their example.