In the final analysis, an investment decision is always about weighing the opportunity against the risk.
The upside to Overstock.com is, frankly speaking, understated. If the company can meet or exceed that $45 million earnings number in the next two years, producing two or three consecutive quarters of surprises for the analysts, I can see its valuation going far in excess of 15x.
This analysis didn’t even touch on the potential for investors to benefit from Patrick Byrne’s legal crusade against certain hedge funds and Wall Street banks. The awards have the potential to be huge and to increase the cash position of the company. Also, what is the upside of Overstock’s investments in its self-described “innovation cycle”? By increasing its technology staff (i.e., operational expense structure) and giving it room to experiment with new concepts, the company is pushing into new areas of the business with little requirement for invested capital (car buying, real estate, vacation deals, etc.). While I wouldn’t lump any of this into the Overstock valuation, any upside becomes a free option.
I’ll confess, there’s a part of me that wants to throw caution to the wind; that wants to abdicate the judgment call to an investing icon like Prem Watsa. Surely he must grasp the risks of Overstock.com better than I and (by virtue of his large investment in it) he obviously still sees more reward than downside.
But it was the risks that kept me awake at night. I did not feel comfortable in my own ability to analyze Overstock’s business risks. I did not feel I could make an informed bet, based on my current knowledge, that Overstock’s business is secure over the next few years. As such, I couldn’t handicap the opportunity.
But again, I welcome the chance to learn more from either other investors or people whose contacts that might have deeper insights into Overstock than I do. The upside potential here is strong, and I’m very open to learning more.
Why write this much about a business I don’t even end up investing in? Excellent question. Because the practice and the process are more valuable than the outcome. And though it can be difficult to sustain concentration on an opportunity once your analysis begins to reject it, we learn as much (if not more) from our decisions of omission.
I wrote at the outset of this analysis that I’m willing to find new ideas from any source, but I’m not willing to let anyone else create my models, do my thinking, or make my final decisions. The practice and process expand my ability to think about valuations, grasp business models, and own the decisions.
I may invest in Overstock in the future. (And perhaps it’s because a reader helps me assess the risks better than I’ve been able to do on my own.) But even if I don’t, this process has made me think hard, made me struggle with priorities, made me extend my insights across industries, and ultimately – I believe – made me a better investor.