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Why Overstock Is on the Radar of so Many Investors

Updated on December 12, 2017

Overstock's blockchain strategy will generate significant growth for the company.

Big financial institutions interestedin Overstock

It's not surprising to hear that Morgan Stanley (MS) took a big position in Overstock (OSTK), as the company has numerous things going for it at this time in relationship to bitcoin and cryptocurrencies that no other publicly traded company does.

Not only that, but it's early mover position also primes it to be a potential takeover target, especially as its ICO launch approaches, where it'll raise capital without diluting its shares while using it to develop its licensed digital coin trading platform with its partners.

As for Morgan Stanley, without a doubt it wants exposure to the licensed trading platform that could become the standard of the industry at a time when cryptocurrencies are starting to go mainstream.

Even as a standalone platform it has extraordinary potential, and if Morgan Stanley decides it wants to take a majority position in Overstock, it would not only control the trading platform, but could infuse more capital into it to scale it out.

Morgan Stanley is also positioned to be rewarded if another major financial institution decides it would rather buy an existing trading platform rather than build one.

If all that happens is a great platform is built that has significant upside growth potential in the years ahead, Overstock and Morgan Stanley, along with other shareholders, will enjoy solid gains.

How to view Overstock

It is an obvious fact no one is investing in Overstock for its legacy e-commerce business. Even if it does well in the last quarter, it won't do much to move the share price of the company.

What has been impressive concerning Overstock's leadership has been how patiently and methodically it has built up its cryptocurrency business, starting with the acceptance of bitcoin as a way to buy some of its products.

That in itself was a great move because it kept some of the bitcoin it received for the selling of its products, and the value has soared since it started accepting the cryptocurrency as payment.

This is important to know because it means management saw the future potential of bitcoin and the blockchain asset class, probably before every other publicly traded company. It makes me wonder what else the company has up its sleeve as the market tries to catch up with it.

Whatever happens with Overstock, it's going to be a winner no matter which way things go. For example, it could be acquired for a premium price; sell off its e-commerce business to unlock its blockchain value; exceed expectations for its ICO; and now with the interest of Morgan Stanley, should enjoy a higher floor on its share price than it has in the recent past.

Reinforcing the blockchain asset class in general, is the launch of bitcoin futures on the Cboe Futures Exchange over the weekend. Although it hasn't been confirmed yet, the market also believes it's inevitable that the okay will be given for ETFs trading cryptocurrencies to be approved.

All of this and more continue to reinforce the narrative that bitcoin, other cryptocurrencies, and blockchain are going mainstream. That will further support Overstock.

Filtering the noise

Interestingly, there are a number of retail investors, and probably institutions, that have shorted Overstock. That's why there's been a lot of talking down of the stock over the last couple of weeks, after the share prices soared.

I knew the pullback was going to be very temporary because there was no reason for it. That has proven to be the case, and the shorts are going to get crushed for taking that position.

The best way to filter through the noise will be in how the reporting on the stock is done. If you hear it referred to primarily as an e-commerce company, you can assume the writer or the organization they represent, have shorted the stock. Does anyone seriously think the recent interest in Overstock comes from its e-commerce business?

Another way to sift through the debris of analysts is if they start talking stuff like "trailing twelve months" and other irrelevant data.

Why do I say it's irrelevant? Because how Overstock will perform going forward will be determined by how the market views the future of its blockchain, bitcoin, and cryptocurrency business, not how many products it sells.

One caveat to that would be if it surprised significantly to the upside with sales, which would reinforce the future optimism and outlook associated with it cryptocurrency business. It would still be considered ancillary to the business, but it would help boost the stock in the short term.

The share price of Overstock isn't being moved by past performance of its e-commerce business, but the future growth potential of the emerging blockchain asset class, which Overstock has been preparing for.

Does anyone think Morgan Stanley took an 11.4 percent stake in Overstock because it thinks its e-commerce business is going to take off?

The ICO

Most of us know about the Overstock ICO, which is projected to raise from $200 million to $500 million to fund the exchange. What a lot of investors don't know is CEO Patrick Byrne has plans for this to be more than an ICO or blockchain exchange, but an exchange that includes all securities; he has a goal of it being the largest exchange in the world.

Byrne said:

"We are thinking very big. I'm not just talking crypto exchange; I'm talking exchange."

Much of the revenue from the ICO will be allocated toward "developing an ecosystem around tZero."

Partners in the trading platform, in addition to Overstock, are RenGen and Argon Group.

Conclusion

Overstock has a lot of long-term potential, although short-term, because of its future now being tied to cryptocurrencies and blockchain technology, will remain volatile.

With the big position take by Morgan Stanley in Overstock, I think it has put a higher floor on the company, and for that reason the volatility is likely to be reduced some going forward, although still be part of its overall performance.

Further out, if it can execute on its plan to become the dominant player in the ICO market, and transition to an exchange for legacy trading, its potential growth is extraordinary, and would definitely further enhance itself as a potential takeover target.

While that could happen in the short term, I think most large financial institutions will probably wait to see how it performs with the ICO part of the business before they make an offer for the company. The reason I think that is because the ICO exchange is the only player in town at this time, and that will make it hard to price.

Also, it's probable some may want to build their own exchanges in an attempt to compete against Overstock. The question there will be whether or not they think it's worth paying a premium for the company in order to buy an existing exchange, rather than go through the time and costs of developing their own.

Another factor will be whether or not Overstock will sell off its e-commerce business, or companies will make an offer for its Medici Ventures division, which has a majority stake in tZERO.

If Overstock can successfully execute on its plan, it will be tough to catch up with the company in its first-mover position.

Keep in mind that Overstock is still a business, and even though it should do very well over the next year or two, it's not a cryptocurrency that has the potential to explode exponentially. The risk/reward is different with Overstock, or any company competing in the sector, than it is with quality cryptocurrencies.

However it plays out, Morgan Stanley obviously sees a lot of potential in Overstock, and will benefit in the short or long term, depending on what its purpose in taking such a large stake in the company is.

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