This ad has been rolling around here at Stock Gumshoe, but I haven’t had a chance to look at it until today… and a few new readers asked about it just recently, so I’m taking my chance now… with the caveat that I last saw the ad circulated about a month ago, so I can’t promise that they’re still actively pushing this company.
The ad is from John Del Vecchio, and the activity in our inboxes here indicates that it ran from June through August — it’s an ad for his Hidden Profits newsletter, which is an entry level service ($79/year) over at Dent Research.
(“Entry level” just means “low priced” — most publishers offer a letter like this that they use as the first step of the marketing funnel that drives people into the more dramatically profitable $1,000+ newsletters… the biggest challenge they have is getting people to pay something, anything, once they’ve got that they know exactly how to upsell you.)
And this “Genesis Code” sounds impressive, indeed — here’s what they say about it:
“It’s so revolutionary that…
“Banks, credit unions, and brokerages stand to save $20 billion a year from it.
“Most homeowners will save an average of $10,000 in transaction fees.
“The $2 trillion in consumer money that’s embezzled and winds up in the hands of terrorists…drug cartels…and enemy countries is about to come to an abrupt halt. Because the Genesis Code holds financial firms 100% responsible for where their money goes.”
Sound familiar? Yes, they’re talking about blockchain — and I know that we’ve all moved on from that, and we’d rather get rich from marijuana nowadays… but these things run in cycles, so who knows, maybe cryptocurrency mania will return someday.
The technology is pretty cool, people are building some amazing-sounding technologies based on blockchain, and it seems to have some real potential in improving data security and replacing cumbersome and expensive transactional and recordkeeping systems… but, of course, the mania got way ahead of the reality, as happens with every investing fad.
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And yes, as cited in the ad, Marc Andreesen, the guy behind Netscape and the powerful venture capital firm Andreesen Horowitz, has indeed been a big crypto bull and did say that blockchain is “the big breakthrough the internet always needed and never had.” That was about four years ago, referring to the key concept of “distributed trust” that bitcoin represents, and lamenting that if it had been available 20 years earlier then it would have been built into browsers (he should know), and that e-commerce might have been built on the blockchain instead of on the credit card networks.
And he may well still end up being right, despite the rise and fall of the cryptocurrency bubble last winter (he more famously said back in 2014, “In 20 years, we’ll talk about Bitcoin like we talk about the Internet today.”)
So yes, this is another cryptocurrency pitch, and we haven’t looked at that sector much since the pot stocks took over the marketing this year… but what exactly is Del Vecchio pitching? Let’s check the clues:
“Ford’s assembly line…Google’s search engine…and Apple’s iPhone — all of these were disruptive technologies that made investors rich. Everyone knows it’s difficult to predict which new technology will be the next big thing. But the Genesis Code is the exception. A new government law practically makes it a surefire bet that every big financial institution will adopt this new program.”
OK, so that’s plenty of hype — the government is slowly getting around to regulating blockchain and researching its use in financial markets, but they’re not forcing anyone to use it.
And perhaps more crazily, they say that blockchain (sorry, “The Genesis Code”) would have stopped all the nefarious behavior that rocked our financial system over the years, from Bernie Madoff to the “fake accounts” scandal at Wells Fargo and the big penalties and fines that US Bancorp and Bank of America and so many others paid for failing to follow anti-laundering rules or safeguard customer money or breaking other rules.
And, of course, there’s a particular company that’s taking the lead here — at least, according to the ad:
“… banks are working frantically behind the scenes to roll out the Genesis Code in 2018.
“They stand to save $20 billion dollars per year and stop a lot of the bad press they get so they have a lot of incentive on the line.
“These banks are eyeing one company that’s poised to help them hit that goal…
“Right now, this one tech company is a $34 million business. But thanks to the Genesis Code they could experience a 2,491% growth!”
So… as you might imagine, that’s what we’re looking for. More clues about this “one tech company?”
“… while dozens of companies are working on their own variation…
“There’s only ONE company leading the charge to make the Genesis Code a part of nearly every financial transaction on the planet.
“They’re not a Silicon Valley tech giant…
“They’re not a big Wall Street bank…
“In fact, most folks have no idea this company even exists!
“But this hidden opportunity could result in a 2,841% windfall within the next 5 years for those that learn about it today.”
Other clues? Indeed…
“… this company isn’t publicly traded….
“They’re a subsidiary of a company that you CAN buy stock in. It’s the ultimate backdoor play into the most disruptive technology of our time.
“Business Insider reported that this company is a “clear leader” with the Genesis Code.
“One legendary investor believes in his backdoor play so much that he owns a 14% stake.”
We also get a definitive clue, which should make things pretty easy for the Thinkolator… we’re told that this company paid out $4,056 in stock-based awards to employees and board members in 2017, and another $21 million in shares of this “Genesis Code” subsidiary.
So we’ve got the answer, but let’s first hear the projection from Del Vecchio…
“Even if the subsidiary of the company I’m telling you about only gets a 25% market share, that would take them from a $34 million company…
“To a $500 billion business!
“That represents a 1,370% growth rate!
“And they still have other business units that prop them up….
“They even have the software that routes 2.5% of U.S. stock exchange trades. And that percentage is growing by the day.
“All this potentially gives them a shot at capturing a piece of a $200 billion market in extra revenue each year.
“So my projection of 2,841% gains is a real possibility.”
We see similar claims for a lot of the emerging companies we hear about, and they sound ever-so-logical — but be careful, going from zero to 25% is a HUGE deal. Google has 75% of the search ad business in the US, which was a new business when they essentially created it in 2000... but still, 18 years later, only about 15% of the total US advertising market. And, of course, Yahoo had way more exciting potential back in 2000 than Google did, to say nothing of the hundreds of search and advertising companies competing in that space that we no longer remember. 25 percent market share is not something you should refer to using the word “only.”
But anyway, that’s the promise and the hyped potential… what’s the stock?
This is, as you may have guessed by now, our old friend Overstock.com (OSTK), the online retailer run by the eccentric and mercurial Patrick Byrne that has been shifting over the past year to invest heavily in a variety of blockchain businesses.
That subsidiary of Overstock is called Medici Ventures, and it is the reason that Overstock has been pitched by pundits in the past — Ray Blanco teased the idea back in April when OSTK was in the mid-$30s, and everyone’s favorite chicken farmer pitched it almost a year ago at the Grant’s conference, helping to start it on its crazy run from $30 to $70 during the height of bitcoin enthusiasm.
The big story over the winter was the initial coin offering for tZero, which has been widely touted as a challenger to Wall Street and the exchanges — a trading platform that handles auditing and permanently stores trades and ownership info on its blockchain. I am not smart enough to tell you whether or not tZero is going to be meaningful, but so far Overstock, like other publicly traded “backdoor” plays into cryptocurrency, is mostly just trading in sympathy with bitcoin prices — as you can see here, this chart compares OSTK shares (orange) to the shares of the Bitcoin Investment Trust (GBTC, in blue):
And, by the way, both Overstock and the Bitcoin Trust have done worse than actual bitcoin over the past year, as the actual cryptocurrency tokens have held up better than the “backdoor” investments… here we add the bitcoin closing prices to that chart (that’s in orange on this one, OSTK is blue and GBTC is red):
I don’t know if that will last forever, of course, and it doesn’t necessarily make sense — Overstock doesn’t deal directly in bitcoin, and doesn’t own any bitcoin to speak of, but it clearly indicates that, sensible or no, Overstock is trading like a bitcoin story right now… and that hasn’t been so healthy this year.
And yes, an eagle-eyed reader did post a solution to this teaser in our discussions section a while back — the right one, it turns out (no surprise there, we attract the smarties here).
What could change that Overstock story? Well, they could do something to really change the valuation assessment of the core business — bullish pundits are right that Overstock doesn’t get the rich valuation that Wayfair (W) or other emerging growth e-retailers get… but Overstock doesn’t have the top line growth that sends people lunging for their broker’s “buy” button, either.
Byrne has been running a sustainable but unexciting e-retail business for years, sometimes turning a profit and mostly breaking even recently, and last year he pledged to stop being the unrewarded rational businessman and start sacrificing profitability for growth to see if they could get a valuation like Wayfair… with the intent, it seemed, of splitting off Overstock’s retail business from tZero and the other Medici Ventures blockchain investments. As of the most recent quarterly report, that initiative seemed to have passed, and they’re no longer advocating that “invest in growth” idea — he was instead talking up “moderate growth and optimizing cash flow” as the best path to help them locate a buyer for the retail business.
So maybe if that happens, things will turn around for the stock… but I wouldn’t hold my breath with this one. For right now, it’s trading with bitcoin, and Patrick Byrne is still doing things that make people scratch their head a little (like selling a chunk of his OSTK shares to buy large personal stakes in some of Overstock’s subsidiaries), and we’re still really waiting to find out whether this tZero exchange will turn into something that gets meaningful adoption or becomes part of the new financial fabric enabled by “The Genesis Code.” If it does, sure, it’s probably deeply undervalued… but the financial world has not exactly been enamored of Patrick Byrne in the past, so I’m not sure to what degree they’ll come banging on his door. After all, there are thousands of startups looking to take leadership in different blockchain initiatives and applications, and every investment bank and financial firm is certainly making its own forays into investigating and testing blockchain technologies on their own or with other partners.
I do enjoy the Patrick Byrne story, and I think he’s right about a lot of things, but I’ve stayed away from Overstock because it’s an awfully complicated soup of operations that’s hard to understand… and because it’s all wrapped up in Patrick Byrne’s crusade against Wall Street and I’m not sure what he’s going to do next.
There is certainly a real business in Overstock.com that has been around for a while and appears to have some staying power, even in the age of Amazon (they’ve had annual sales over a billion dollars since 2012 or so, and have mostly broken even while their competitors have
lost invested millions or billions). Whether you think that’s worth $500 million or so, which was the Wall Street consensus over most of the past decade (as represented by Overstock’s market cap), or tons more because of the tZero and Medici investments… or less because of Wayfair and Amazon putting too much pressure on the core business, will tell you whether or not it’s worth taking a flier on them at this $800 million valuation.
And a 2,841% gain? I wouldn’t count on it… but i will give Del Vecchio credit, at least, for using a rational timeframe — most newsletter pitchmen will tell you that 1,000% gains are right around the corner, likely in a matter of weeks, but this Hidden Profits ad only pitches that huge return as likely over five years. Maybe he’ll be right, I don’t know… that’s not the conclusion I think is likely, but that timeframe at least makes it possible — so kudos to him for that.
Whichever side you come down, let us know what you think with a comment below.