The online liquidator
announced on Monday that it is seeking to raise about $130 million through a public offering and by selling convertible notes. The move would mark the second time this year -- and the fourth time in three years -- that the company has tapped the public markets for more cash.
Earlier this year, CEO Patrick Byrne
stated that the company didn't need the public markets to see it through the cash-intensive holiday season. That Overstock has gone to the public well twice since then is not a good sign, the company's skeptics say.
Overstock continues to "overpromise and underdeliver," said one buy-side analyst who has been a long-time critic of the company and its management.
"This is a case where, to refresh his
Byrne's inventory, he has to burn more cash," said the analyst, who asked not to be identified. "It's amazing that he keeps finding people to give it to him." (The analyst's fund has no position in Overstock).
The analyst is not alone in his skepticism. As of early October, investors were shorting about 43% of the company's float.
But the company has plenty of believers as well. In the weeks following the company's better-than-expected third quarter
report, its shares have traded near their all-time highs. And following that report, many sell-side analysts either upgraded the stock or reiterated their rosy ratings.
Overstock has given the skeptics plenty of fodder, said Rob Wilson, an analyst who covers the company for Tiburon Research Group, but many of the company's fundamental results are improving, including its revenue, gross profit and bottom line, he noted.
"I still wonder if five years from now if this is a viable business model," said Wilson. "But when the numbers are getting materially better each quarter, then there's no reason to have a negative outlook on the company." (Wilson does not own the stock and Tiburon does not do investment banking.)
Still, investors may wonder what the company will do with the cash and why it's returning to the public markets yet again.
Earlier this year, the company raised about $35 million in a separate
stock offering. Meanwhile, the company had raised about $24 million in a follow-on offering last year and about $26 million in its initial public offering in 2002.
Overstock's latest proposal would raise about $75 million through a debt offering and about $55 million through a stock offering.
In a regulatory filing, the company said it plans to use the funds for working capital needs, inventory purchases and sales and marketing. The company also held out the possibility that it might use the cash to purchase "complimentary technologies or businesses."
An Overstock representative declined to comment, citing a quiet period related to the offerings.
Despite its relatively small size, Overstock has long been the subject of investor scrutiny. Much of that has to do with the company's boisterous CEO, who has drawn attention to himself and his firm both through his personable -- and sometimes long-winded -- shareholder letters and through his outspoken criticism of the company's critics and rival firms.
Byrne has tried to position his company as an alternative to e-commerce leaders
, attempting to attract customers with a diverse selection at bargain prices. The company started off by offering liquidated and returned goods, but has since broadened its offering with new goods and items drop-shipped from manufacturers and distributors.
But many critics worry that the company has more in common with Amazon than with eBay. Unlike the online auction giant, which was profitable right out of the gate, Amazon had to keep tapping the public markets to fund its billions of dollars in losses before it started generating cash.
Overstock has burned through a mere fraction of Amazon's total and, not counting its proposed debt offering, has almost no long-term debt. But critics see similar patterns between the two companies and a similar search at Overstock for a workable business model.
After posting a profit in the fourth quarter of 2002, the company has posted a loss in seven straight quarters. The company's operations have consumed $12.4 million in cash after going through some $10.4 million in cash last year.
While that might not seem like a lot of money, Overstock's stash of cash and marketable securities stood at just $40 million at the beginning of this year and fell to below $10 million during the holidays last year as it was building up its inventory.
Investors gave Amazon plenty of time -- and money -- to find a profitable business, but skeptics worry that the public markets won't be as patient with Overstock.
"Overstock has nowhere near what Amazon had" in terms of cash, said the buy-side analyst. "Patrick
Byrne doesn't have the wind at his back. Their fuse is a relatively short one."
The key for Overstock will be whether it can generate cash in both the fourth quarter this year, when it should see a windfall of holiday sales, and the first quarter next year, when it has to pay its suppliers for the goods it sold during the holidays, said the buy-side analyst.
If the company is able to do that, "then I'll be impressed," said the analyst.
Meanwhile, the company's plan to spend some of the newly raised funds on marketing may trouble investors and analysts. In the first three quarters of this year, Overstock's marketing budget has nearly doubled to $20.4 million. And in the third quarter, it was up a whopping 144% over the same period last year.
"I think Patrick has no clue how to figure out customer acquisition costs," said the analyst.
Although Wilson has much more faith in Byrne, he too is troubled by the marketing spending. The problem the company faces is not a management problem, but a business model problem: it depends on advertising to drive sales and prices of online advertising in particular are rising as traditional companies such as
buy up advertising space, he said.
"It's hard to be comfortable with a business model that's that dependent on marketing," Wilson said.