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Stock Deconstruction

Does Overstock’s share price have any upside left?

Overstock’s [OSTK] share price has been one of the retail stocks able to realise impressive growth despite the coronavirus downturn. Since the start of the year, Overstock’s share price has skyrocketed an astronomical 1,044.74% from trading at circa $7 to $80.59 at 14 October’s close. Its 52-week low of $2.65, registered on 16 March, pales into insignificance compared to its 52-week intraday high of $128.50, which it reached on 19 August. So, what’s behind Overstock’s share price success?

The recent ecommerce boom, largely prompted by the coronavirus pandemic, has been a major driver of Overstock’s share price this year.

 

Revenue raises expectations for Overstock’s share price

In its second quarter earnings report, Overstock posted a total revenue of $783m — up 109.5% year-over-year — while gross retail sales topped $1bn — 114% higher than the year-ago quarter.

Total revenue for Q1 2020 had been $352m, a year-over-year decrease of 4%, and the company reported retail sales being up 120% in April.

Newly acquired customers increased 9% year-over-year in the first quarter, and by 205% in Q2.

Meanwhile, sales from orders placed via mobile devices accounted for 46.3% of total sales in the three months to the end of March, up 3% from Q1 2019. For the three months to the end of June, the corresponding figure was 50.8%, up almost 7% from Q2 2019.

 

Bargain hunters boost Overstock’s share price

Lockdown and shelter-in-place orders have driven Overstock’s share price to unprecedented highs.

The retailer, which, as its name suggests, is known for selling overstocked items from well-known brands at low or clearance prices, has seen web traffic to its site increase for a couple of reasons.

People have been looking to make use of the extra time spent indoors by browsing the internet. The pandemic has also caused job and income uncertainty, meaning some individuals are no longer prepared to pay full price for certain brands and are instead looking for bargains. 

Overstock hasn’t provided guidance for the third quarter or full fiscal year, given the ongoing impact of the pandemic. However, robust sales figures are likely as consumers continue to shop online despite brick-and-mortar stores reopening — many due to lingering hygiene and health concerns and others for the sake of convenience. 

 

The crypto effect

Overstock’s share price is also benefitting from the increasing diversification of its business. In 2014, it launched a fully-owned subsidiary, Medici Ventures, to invest in and build blockchain start-ups.

Such was the fervour around blockchain that Patrick Byrne, the then-CEO of Overstock, announced at the end of 2018 that the intention was to sell off the retail business to focus on cryptocurrency technology, CNBC reported. These plans were scrapped a few months later.

However, in the second quarter of the fiscal year, revenue accrued by its security token platform tZero was $13m, up 129% year-over-year. The number of tZero crypto app users rose 42% between 31 March and the end of June, marking a 100% increase year-to-date. Revenue for Q1 had been $10m, up 128% year-over-year, and its app user numbers increased 40% between 31 December and the end of March. 

Overstock expects its blockchain business to go from strength-to-strength and its share of total revenue is likely to grow in the quarters and years ahead.

It received a further boost in early September when the Financial Industry Regulatory Authority approved tZero’s application to launch a retail broker-deal subsidiary, which will offer customers retail brokerage services for digital securities.

 

A different kind of buyer

Rick Patel, analyst with Needham, has initiated a Buy rating for the stock and set a price target of $96, which implies a 19.1% increase from its price at the close of trading on 14 October. He feels that Overstock’s share price and revenue growth will continue to be pushed higher in the economic environment created by the pandemic.

“Concurrently, Overstock has benefited from a more focused strategy and self-help initiatives across mobile, pricing, marketing and customer service,” Patel wrote in a note to clients, seen by Barron’s.

Ygal Arounian, analyst with Wedbush, has assigned the stock an Outperform rating and target price of $92. He’s also bullish on the retailer and, like Patel, sees room for Overstock’s share price to rise further. Although the stock may have increased tenfold already this year, it’s currently down 37.3% on its 52-week high of $128.50.

He sees potential for a leap in Overstock’s share price around the time the company reports its next earnings, due on 10 November.

Arounian expects the shift from bricks-and-mortar retail to online to continue for the rest of the year, going into the holiday season, and for the best part of 2021 at the very least. 

In a note to clients seen by Barron’s, he praised Overstock’s pricing strategy for improving its margins as well as its marketing strategy to broaden its target market.

Its “leadership team is squarely focused on the ecommerce engine and sustainable, profitable, growth”, he wrote. 

In total, there are currently just seven Wall Street ratings for the stock, according to MarketBeat. Five of these are Buy and the other two Hold. The consensus target for Overstock’s share price is $96.86.

 

Disclaimer Past performance is not a reliable indicator of future results.

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