Overstock.com Stock: Remaining A Skeptic (NASDAQ:OSTK)

Overstock.com (NASDAQ:OSTK) serves as a stark reminder of how reality doesn’t always align with hype. The company’s history is marked by missteps, including internal management issues and its foray into cryptocurrencies and blockchain technology. Consequently, Overstock’s stock price has been on a rollercoaster ride over the past seven years, facing significant fluctuations and challenges. Its most recent rise was brought on by Overstock’s rebrand into Bed Bath & Beyond.

Every rise has had its subsequent reality check as the high expectations and valuation make its stock price very vulnerable. In this write-up, we’ll delve into Overstock’s recent performance, assessing whether shareholders have reaped any benefits from holding this stock over the last ten years.

On to the next pump

Overstock operates as an e-commerce company, providing a platform for customers to purchase a wide range of products online. The company’s business model involves selling goods directly to consumers, as well as acting as an intermediary for third-party sellers on its marketplace.

Overstock’s key focus is on offering discounted and surplus merchandise, aiming to attract value-conscious shoppers. It operates through various product categories, including home goods, furniture, exercise goods, and more. Although the company aims to serve a niche segment and differentiates itself this way, at its heart it is still going against some of the biggest retailers with online platforms such as Amazon (AMZN), Walmart (WMT), Costco (COST), etc. This always puts the company at a disadvantage. But what about retailers that are more comparable in size with Overstock? Most small players along with Overstock are struggling and are in a tough situation.

The company even acquired Bed Bath & Beyond’s brand and IP and is transforming and switching its operations under the new name. This contributed to the latest surge in its stock price. The company’s stock price almost doubled from its lows in May.

We have seen this story before and we have also seen how it plays out. The company announces a “transformative” move and the market gets ahead of itself, reality plays out and the stock price corrects itself. So what should be different this time? How can this rally be sustainable?

The CEO has admitted that the industry is currently in a recession and the macro will stay hard for the foreseeable future. While the company’s strategy may be to improve sales, it may not be enough to rescue the current meteoric rise in stock price. For the rally to have legs, it will have to work on improving its margins.

For the latest quarter gross margins came in at 22% and operating margins at -1%. Improving the bottom line could provide the market with the needed justification to support this rally.

What have the shareholders seen?

For long-term investors of this stock, I was curious to check if there was any benefit at all from holding the stock. There is a simple and quick way to see if the management is bringing any benefit or returning any value to shareholders (you can say it’s one of the first things I check before I dive into my analysis). Looking at your share of the pie. If it’s a story of growth, look at the revenue per share; if it’s a story of value, look at profitability, cash, book value per share, etc. From what I see, outside of the balance sheet the other metrics have not shown any growth.

Outside of the recent dip in the topline and the bottom line bringing down our per-share metrics, a big reason for flat (or even declining) growth is the increasing dilution. The past ten years have seen the share count almost double.

Hard to understand the premium

Most of the valuation metrics for LTM are unusable due to the company’s current financial condition. Looking at this company plainly from a sales multiple perspective, PS is at 0.95 and EV/S is at 0.77. There are a lot of uncertainties surrounding NTM multiples. The rebrand is supposed to help the company grow its sales and there are early indications of this working in the Canadian market. But the CEO has also admitted that this is a move that will pay off only in the long run. This is what he had to say in a recent interview with Barron’s –

I’m not convinced the Fed’s done raising interest rates. I think student loan repayment will probably be another headwind that the economy has to deal with. So I think the macro stays hard.

This uncertainty means we will have to evaluate our multiples under a range of scenarios.

In its worst case, where we see Overstock underperform greatly and its sales drop by 40%, PS and EV/Sales would be at the high end of this range. Going by the numbers from the 2023 quarters where we saw sales drop by 28% and 20%, we could see PS and EV/S at 1.2 and 0.9 approximately. It is highly doubtful but in the best-case scenario where we see a big turnaround in their business and sales improve, PS and EV/S ratio would see a minor drop but it still would not be cheap when compared to the other companies in the industry. Any premium in its valuation at this point is hard to understand and can only be explained by the hope that the recent moves made by the company will turn out to be beneficial.

Final Call

I believe the recent rise in the stock price bakes in most of the expectations from its recent move from the rebranding. This just marks the latest turn for this business. Overall, the company has not done much for shareholders and has performed poorly over the last ten years. I prefer to remain a skeptic this time. As they often say “Seeing is believing” and when I actually start to see concrete results from their turnaround plan that is when I will revisit my thesis. Till then, it would be wiser to sell into this rally.