Looking for stocks with long-term value, reasonable price, and high growth prospect is a never ending process. There are thousands of stocks to scan and analyze.
One such prospect is Overstock (OSTK). It is an online retailer with a primary focus on selling furniture and home improvement goods and competes with the likes of Amazon and Wayfair.
Overstock made headlines last year when it became the first domestic retailer to accept cryptocurrency as a form of payment.
And the overstock stock obviously blew up on the crypto news but came back to its original price soon after. At the time of writing, it is consolidating in a range.
But as value investors, we don’t care about short-term price movements. The question we ask is, is overstock stock a valuable company to invest in that can provide great returns 5-10 years from now?
Instead of asking this question to anybody else, why not ask to overstock themselves. We’ve Alexis Callahan, the director of investor relations at Overstock.com.
She will walk us through all the changes that overstock.com has been making in the past two years, what is their vision for the future, and their views on blockchain technology.
Overstock Overview
Overstock began its operations in the late 90s as an online liquidator, hence the name. It went public in 2002 and essentially became a general merchandiser in the early 2000s.
Over the years, it has increasingly moved into the furniture and home furnishing space, which has become a real core competency now.
Along the way, Overstock also formed a subsidiary called Medici Ventures, which invested in a number of early-stage blockchain businesses.
The pivotal moment came for the company in the fall of 2019 when it decided to completely move its focus from being a general merchandiser and selling everything under the sun to being niched and focusing only on home furnishing.
The company aims to deliver smart value in the home furnishing space, meaning great products at great prices.
Overstock doesn’t wanna sell luxury products, neither wanna be an everyday low price leader, but somewhere in the middle where they feel sizeable demand exists.
Their target customer is basically people who naturally have a higher propensity to shop at Overstock, which is roughly 40% of their domestic customer base.
Talking about market share, Overstock has just taken over Target to become the fourth largest online home furnishing retailer in the country.
What Changes is Overstock Making?
There’s been a lot of skepticism around Overstock stock in the past. For a long time, the stock has been stuck below the $40 level, which it broke in June 2020 and went as high as $125 thanks to the boom Covid provided to e-commerce.
However, according to Alexis, the price appreciation was not just Covid luck. Covid actually masked a lot of operational changes that the company made around the same time.
Before the appointment of its new CEO, Johnathan Johnson, in the fall of 2019, the company literally had 27 “key initiatives” with no priorities. They whittled that list down to four that they focused on in 2020.
One of the major changes was upgrading the company’s tech stack, which enabled better real-time information on customers, their behavior on-site, what they were clicking on, what they were responding to, and it also helped improve the website’s back end and CRM functionality. This helps a lot from a machine learning perspective as well as a targeting perspective.
Technology has been a focus recently with an emphasis on machine learning models, which helps do things like recommending products more efficiently or more appropriately based on somebody’s clicking history.
Overstock has also hired a new Chief Marketing Officer that they brought from Amazon, who will be looking at channel optimization for better and faster customer acquisition. Or at a higher level, just getting more direct traffic, so there is less reliance on things like page search, email, and those types of methods.
Future Growth and Goals
From an investor’s point of view, fortunately, or unfortunately, we always want to see growth and scale from the company.
Like if the company is doing well, that is great for the company, but it may not be great for the long-term value investor.
The major focus of the Overstock team is on sustainable, profitable market share growth in the long term.
The company is turning its attention back to the e-commerce business with the goal of becoming a big player in the category, meaning growing faster than the market and capturing market share.
In the short term, the company is very focused on growing organically, trying to get the low-hanging fruits first to propel the company forward.
But it is not outside the realm of possibility to eventually grow inorganically, meaning making acquisitions along the way if it makes sense, making strategic partnerships, etc.
Is Blockchain Still a Priority?
Overstock came into the headlines because of its crypto initiatives, and the company has also made many investments in various blockchain businesses through its subsidiary Medici Ventures.
So is it still a priority at Overstock, or is the company now focusing exclusively on the e-commerce side of the business?
According to Alexis, they have never been as bullish on blockchain technology as they are today, but they’ve still made some noteworthy changes.
In January 2021, Overstock announced a strategic partnership with a venture capital firm, Pelion Venture Partners, to manage its portfolio of blockchain assets.
The reason was that many of those companies in the portfolio have gotten to a stage where they needed more time, more attention, and just a team of seasoned professionals that are capable of taking disruptive tech companies to the next level.
The decision was taken to help all the parties do what they do best. It allows Pelion ventures to do what it does best, take tech companies to the next level. It gives the portfolio companies the best chance at success, and it also allows Overstock to focus exclusively on its e-commerce business.
From an investor’s point of view, it’s a very helpful decision in two ways. First, it limits Overstock’s liability to the amount they’ve invested in this fund, significantly limiting the cash burn.
And second, it allows the company to deconsolidate these businesses from its financial results, meaning the portfolio companies who were making losses and dragging Overstock’s EBITDA down can no longer do so. It positively impacts the valuations.
Should You Invest in Overstock Stock?
Fundamentally, when you think about investing, you think about looking for sustainable companies in enduring industries.
Overstock operates in the home furnishing industry. Is it an enduring industry? Well, as things stand, we would probably still need home furniture 5 or 10 years from now.
So the question isn’t whether the customers will continue to buy home furnishing in the future but from where? Online or in-store.
It largely depends on your understanding of the market and the company whether you think Overstock qualifies this criterion or not.
Another important point while investing is looking at the valuation you’re getting. Overstock historically remains underappreciated by wall street.
The PE of Overstock at the time of writing is 9.22. When compared to peers like Wayfair at 56.22 and Amazon at 62, seems largely undervalued.
If Overstock, which has recently turned profitable, can produce consistently profitable results, then the stock price will surely be appreciated.
It means there’s a lot of runway ahead of Overstock and the recent profitable results might also give confidence to new investors as well as the company management itself.
Investing in anything is completely your decision, and you should do proper research before investing in any asset. Invest according to your risk tolerance and financial goals.
