Thursday, August 25, 2005

How Long Can OSTK Last?

Going strictly on OSTK’s recent quarterly figures, the company’s burn rate (excluding capex) is approximately $3.4 mil. At this rate, its cash reserves and recent quarterly numbers imply that OSTK will run out of cash in about 9 months. Working cap burn rate gives a slight glimmer of hope for OSTK, suggesting that it has almost 15 months.

What are they going to do about cash if they don’t drastically improve operating and net margins? I can understand that Pat Byrne uses his company to favor consumers, but this comes at the cost to its bottom line figures. He doesn’t want to “play the Wall St. game” and gives little importance to EBITDA. Growing top line is easy when you’re practically giving things away, but what does that mean for its shareholders?

Pat Byrne seems like he’s reluctant to issue more shares to float. Its cost of cap is most likely to go up as banks would most likely second guess before lending to OSTK (who knows how it would be spent). I’m not sure funding his crusade would reflect a wise investment.

Was all of this commotion a bad and costly publicity stunt to get people to visit overstock.com? Pat Byrne takes the insults and then passes the company off to his father, as he stated this plan in the recent Q&A with Motley Fool. Whatever the case, its business model makes little investment sense. They need to seriously improve operations. Its future simply remains too uncertain, especially with all of its hoopla going on now.

8 Comments:

At 1:18 PM, Blogger Bingolabs said...

Overstock has $287M in cash. They are hardly using any of it. You could be living in a world of illusion.

 
At 2:42 PM, Blogger Sam S. Park said...

Bingolabs,

I'm not sure exactly where you are getting your figures... but I'm guessing that you may be looking at the "balance sheet cash". But even the balance sheet cash item wasn't that high. I was refering to the "cash from operations" and "free cash flow to equity holders". These are more important when you want to understand how a company is using their cash at hand. You should take some time to understand how to read a cash flow statement. Thanks for visiting and please come again.

 
At 12:34 AM, Blogger Sam S. Park said...

Oh, I forgot... you might also want to take the time to calculate cash burn rate.

Burn rate = Total cash position change/Time period

Time left before cash runs out = Cash reserves/Burn rate

Yes, I live in a world of illusion. This illusion is called the land of financial analysis. This is where competent analysts come together to analyze companies and economics.

 
At 1:02 PM, Blogger Bingolabs said...

I also live in a world of illusion. It's called Patrick Byrne's fun house.

I don't mean to bust your chops... I like your blog. However, cash flow from operations is about flat in the most recent quarter if you take out the inventory delta. And when you include liquid securities as cash balances you see that the company's liquidity situation is fine. In fact the way I see it, the company has more than 9 months... they have about 23 years at their current cash burn rate. (Using Q2 figures)

Have a fine day.

 
At 2:10 PM, Blogger Bingolabs said...

My illusion continues.

Looks like they have $120m in cash and cash equivalent. I was looking at 2004 numbers

 
At 2:22 PM, Blogger Sam S. Park said...

Bingo,

I like your comment of living in Byrne's fun house... it sounds fun. Anyways don't worry, you're not busting my chops. I actually appreciate all points of view.

You're right that OSTK would have positive cash flows when you factor the marketable and liquid securities and assets. But when you calculate "free cash flow" you shouldn't factor the marketable security sales and purchases... it's not really a part of a company's primary and core operations. Typically when one considers free cash flow to equity, the portion from "cash from investing activities" that should be considered is the fixed capital expenses (which should exclude proceeds and/or payments from and for marketable securities).

I'm guessing OSTK sold $100 mil worth of marketable securities because they were in dire need for some cash. Unless you have a better explanation why OSTK liquidated those assets and how it relates to the company's real investments for the core business, I don't think you should be factoring that huge amount that would distort the the cash flow analysis.

Otherwise, thank you for the comment about my blog. Honestly, I don't mind your criticisms because I firmly believe in listening to all sides to get to the truth. I look forward to more open discussions.

 
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At 5:57 PM, Anonymous QUALITY STOCKS UNDER 5 DOLLARS said...

Interesting question

 

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