Roll Out the Overstock.com Playbook
As the virus engulfs the U.S. once again — I can’t help but think it’s time for the 2nd wave of Overstock.com (OSTK) going ballistic again.
Highlighting the insanity of 2020, Overstock.com shares were trading at a pitiful $2 on March 11 and then lockdowns happened, and the stock never looked the same again.
To say that underlying shares went parabolic is an understatement, the meteoric rise from $2 to $115 in a 5-month span is stuff of legends.
Remember that Overstock.com was just a middling backwater stock almost as Myanmar’s mediocre geopolitical status is to the Asian continent.
In fact, shareholders were in the process of searching for a buyer — in a way waving the white flag as a resentful ending to a half-hearted try to catch Amazon’s (AMZN) e-commerce business.
Overstock.com sells everything from baby toys to wrought iron firepit décor.
If it’s for the home or something related, they probably have it in store for you and as Covid has throttled the population’s go-to shopping places from strip malls to the shopping lanes of America, Overstock.com has become an outsized winner.
Let’s get into the weeds of their business.
With the tectonic shift to e-commerce likely permanent, shares can keep rallying specifically because the risk of another lockdown is increasing and the virus spreads again.
Multiple catalysts, both on the macro and micro level that can drive continued upside to revenue meaning high estimates for Ebitda (earnings before interest, taxes, depreciation, and amortization).
Bricks-and-mortar stores will continue to bleed market share to online competition even if the virus is handled, providing a tailwind for Overstock into 2021.
The company’s improved pricing model will shoot margins higher, while it also works to broaden its target audience and expand marketing.
Overstock has evolved in recent years, thanks to new management and a new strategy, which includes a timely focus on home goods, a retail standout during the pandemic. It also has blockchain-based ventures that bulls say the market is ignoring.
The one-sentence answer to why the stock has gone ballistic is easy — 109% revenue growth year over year.
The company ended the quarter with a healthy balance sheet that included a cash balance of over $300 million.
Overstock Retail's exceptionally strong second-quarter performance was on fire supporting a 200% increase in new customers, and profitability, as measured by adjusted EBITDA, improved by $51 million year over year.
A key takeaway here is the scalability of Overstock’s pure-play e-commerce model and efficiencies created through partner drop-ship program.
Overstock’s overarching goal is to create operating leverage by growing top line at a faster pace than operating expenses.
Overstock is profitably gaining new customers and making progress toward achieving sustainable, profitable growth long term.
Last quarter, revenue from their Retail business was a record $767 million and customers are increasingly finding and purchasing products in core home furnishings categories.
Compared to the second quarter of 2019, new customer growth increased by over 200%, and Overstock has experienced strong customer purchase repeat behavior.
Gross margin improved by almost 3.5% year over year and the margin improvements were fueled largely by operational efficiencies, as well as several onetime items unique to the second quarter of 2020.
The onetime items included lower costs from being understaffed in the customer care organization as Overstock adjusted to increased sales volumes, a benefit from fulfillment-related charges as part of the service level agreements to protect customers' experience, and lower discounting activity as they strategically balanced marketing efforts against product availability and stockouts.
Operating expenses improved 5% as management was able to leverage technology expenses, illustrating the strong operating leverage inherent in an e-commerce business.
Overstock is one of a slew of internet companies that will harvest the fallout from another spread of the virus.
I believe it’s time to roll out the Overstock playbook again and buy and hold shares.
For short time traders, this is a beast of a stock to execute short-dated trades on because of the elevated volatility, but in general, I am bullish on this company through 2021.
