Stock Overview

$OSTK

Aug 04, 2022

By @SLMacro

Overstock.com

As we continue an overview of stocks on my “watch list,” this week I spotlight Overstock.com ($OSTK). Overstock is the 4th largest online retailer of home goods. The company used to carry other products as well, but in June completed their transition to 100% home furnishings. On top of the core business, Overstock.com has a growing foothold in the cryptocurrency and blockchain space. The core business should continue to add value to the share price, while the speculative partnerships in blockchain could provide future outsized returns.

Overstock.com is the 4th largest retailer in home furnishings, lead in order by Amazon, Wayfair, and Walmart. The closest direct competitor is Wayfair, who is also almost exclusively only online. The last 2 years with Covid, the industry saw a surge in increased online conversion of consumers, and $OSTK was able to significantly benefit from this transition. 2021 they had record revenue and EPS. Prior to the pandemic, the company had struggled and underwent management changes amid concern on the direction of the company. With the increased traffic via the pandemic, a concerted effort to cut costs, and decision to focus products, $OSTK was able to grow market share and has now produced a profit 9 quarters running. During this time, the company saw share price go from a low in 3/2020 of $2.51 to a high of $128.50 just 5 months later.

Since November the company has had a large pullback, dropping over 70% and now sits at $29.07. The recent low was $24.75. One could argue that much of the pullback was warranted, as the last 2 earning reports have missed estimates, and revenue and profit have been declining. This has been an industry wide phenomenon, a result of macroeconomic conditions with increasing inflation and rising rates. On top of this, last quarter $OSTK completed its transition to be focused 100% on home furnishings, resulting in some loss of sales.

Last quarter, $OSTK reported $0.19 EPS, missing estimates of $0.34. Revenue was $528.12 million with expectations of $600.73 million. Revenue for the quarter was down 33.5%. Increasing gas prices, interest rates, inflation, and geopolitical events all had an impact on consumer sentiment and behavior. This impact is expected to continue for the next few quarters and will continue to pressure the company in the near term. Despite the headwinds, the company has been able to navigate the landscape and remain profitable the last 2 quarters. Margins were also able to stay positive. Compare that to competitor Wayfair, who reports Q2 results on 8/4. Q1 they had revenue drop of 13.95%, net income was down 1872%, profit margin was negative -10.66%, and EPS was negative $-3.04. While $OSTK has remained profitable 9 quarters in a row, Wayfair has now had 3 nonprofitable quarters that have worsened sequentially and Q2 will also be negative, making that 4 quarters.

Overstock continues to have positive free cash flow and is well equipped to handle a market downturn. They have $443 million cash on hand and only $36 million in debt, with no significant debt maturing until 2030. One advantage they have that many of the other home goods retailers don’t have is they have a very asset-light model. In the face of this economic downturn, this protects gross margins, which were at a high of 22.9%. There is not pressure of significant owned inventory and infrastructure and no need to mark down products at a discount like other retailers.

Growth since 2019 has outpaced the market at 44% and the home related business (which $OSTK has pivoted to 100%) has grown 60%. Average order size continues to increase and was up 16% last quarter to $247. Overstock has been concentrating on growing the mobile business, and the most recent quarter saw app downloads increase 85%, on top of 54% growth the previous quarter. Canada remains an untapped market that $OSTK is pushing into and plans to grow that market to equal 10% of US revenue over the next few years. It will take some time to resume positive growth in my opinion, and that is directly due to the macroeconomic outlook and not company execution. In the meantime, they will have to return value to customers by continuing their share buybacks and keeping costs low and continuing to have a positive EPS. Q1 they bought back $25 million in shares and Q2 they bought back $35 million more shares. The share repurchase program runs until 2023 and has $40 million left.

Blockchain Interests

Much of my interest in $OSTK has nothing to do with the core business, it is around the blockchain business segment. In 2014, Overstock launched a subsidiary called Medici Ventures to leverage blockchain technology to solve real-world problems with transparent and secure solutions. As the work in Medici ventures progressed, they decided it needed dedicated management, and handed day to day operations and investment decisions of the Medici portfolio to Pelion Venture Partners. There has been some significant movement since then, specifically around tZERO which excites me.

Currently Pelion is managing 21 different blockchain projects with Medici. Many of these would be considered upstarts in series A but others are more mature such as tZERO.

Medici Portfolio

· Amberdata

· Bankorus

· Chainstone

· FinClusive

· Grain Chain

· Medici Land Governance

· Minds

· Netki

· Peernova

· Ripio

· SettleMint

· Spera

· Symboint

· tZero

· Vinsent

· Vital Chain

· Voatz

· Votem

· Factom

· Evernym

BITT

Bitt is a world leading digital currency expert that provides central bank digital currency and stablecoin solutions for central banks, financial institutions, governments, and financial ecosystem participants worldwide. They provide central banks with solutions they need to meet regulatory and policy requirements as they develop and implement digital fiat currency as legal tender. Their aim is to consult and collaborate with government entities to test, launch, and manage digital currency. The Bitt Digital Currency Management System (DCMS) is the technology behind most of the current live central bank digital currency deployments in the world. Bitt recently added two new members from the Criteo Bank Digital Currency founding team, including Jim Shinn and Erik Bethel. The Criteo team has successfully engaged over 12 central banks in Latin America, Africa, Europe, and Central Asia. As banks and governments continue to move toward a fiat system that is digital, stable, secure, and has instant settlement, I expect Bitt to play an increasing role.

tZERO

The crown jewel of the blockchain space for $OSTK is with tZERO. It is their largest blockchain asset and is a trading platform for digital assets, with a current focus on private companies looking to trade on a regulated market. The platform allows account holders to trade private tokens, NFTs, and regular cryptocurrencies. What sets it apart has been their deliberate intention to create a regulated market. tZERO is registered with the SEC and a member of FINRA and SIPC. While much of the crypto world has been busy in cash grabs and blatant frauds, tZERO has been forging ahead seeing the big picture. They realize the long-term solution to cryptocurrency and tokenization requires oversight and regulation.

In my opinion, tZERO is laying the groundwork to revolutionize conventional investing as we know it. I believe if they can execute, it is the future of blockchain exchanges. Imagine being able to quickly match bids and asks. Imagine being able to instantly settle transactions instead of having to wait 3 days. It would eliminate the need for market makers to a degree. It would eliminate the need for middlemen like Citadel and make payment for order flow obsolete. Most recently, tZERO took some very exiting steps that reinforce my belief. In June they added two new members to their board, Edwin Marshall and Michael Blaugrund. Marshall is a former Chief Technology Officer of Intercontinental Exchange (ICE) the parent company of the NYSE. Blaugrund is the Chief Operating Officer of the NYSE. tZERO also appointed David Goon as Chief Executive Officer. Goon is currently the Chief Strategy Officer of ICE. I am a firm believer that where there is smoke there is fire, and tZERO appears to be laying the groundwork for major moves in blockchain equities.

Conclusion

$OSTK is a company I plan to keep on my watch list. In the past I bought the stock at $24 and sold it between $100 and $115. I recently opened a small position and will be looking to add on any deep pullbacks or when the macroeconomic outlook improves. The next few quarters will be challenging, but I expect the company to hold up well by remaining profitable and continuing buybacks. The fact they do not have any significant inventory overhead like others is a major advantage. Its major competitor, Wayfair is burning cash at an unsustainable rate, and if they remain unprofitable will come under major pressure. I believe $OSTK will be well positioned when that happens to take market share. While the home furnishings business is the bread and butter, that is not really the reason I like the stock. I am interested in it for the blockchain play. This stock allows me to speculate in the blockchain crypto space, while taking on minimal risk (compared to other blockchain companies). In my opinion the $OSTK stock price only takes into account the online home furnishings business, and the blockchain businesses can be had for free. While there is likely plenty of time to get in at a decent price, over the next few quarters, the long-term outlook is bright and this is a company I want to own.

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