After ninefold growth this year, Overstock shares look set for more gains

Like most e-commerce companies, Overstock.com Inc. (NASDAQ: OSTK) is cashing in on the shift in people’s shopping behavior during the COVID period. Rather than a temporary gain, the current momentum could mark the resurgence of the company that was going through a bad phase about a year ago, after its founder stepped down abruptly and the crypto business faced a high-level inquiry.

Also read: Digital transformation opens up new opportunities for Alibaba

Commenting on the company’s outstanding second-quarter results last month, which is mainly attributable to the popularity of digital shopping during the crisis period, chief executive officer Jonathan Johnson reaffirmed the strategy to focus on the blockchain business. Justifying the management’s optimism, tZERO Markets, a subsidiary of Overstock that provides retail brokerage services for digital securities, recently got approval from the Financial Industry Regulatory Authority.

“The Overstock retail business model is well suited for the current environment, which is arguably becoming the new normal. That is now abundantly evident in our sales numbers, which increased more than 100% in the second quarter year over year. Because of our focus on technology and automation embedded in our systems, our model scales effectively and cost-efficiently, even when sales double,” Johnson added.

Buy OSKT?

In a sign that the market is equally bullish about the company’s crypto prospects, the stock rallied last week but pared a part of the gains later. The price moderation is a buying opportunity no one would want to miss. The latest target price represents a 45% upside, which makes the stock an attractive investment. However, it was a different scenario less than a month ago — the fundamentals remained solid but the stock was at its peak with a relatively high valuation.

Shares of the Utah-based company, which also develops blockchain applications, were trading up 14% on Monday afternoon, suggesting that the investment opportunity might not last long.

What’s Changed

Experts recommend buying the stock, citing the acceleration in revenue growth and stable market share gains. Overstock’s controversial founder Patrick Byrne had sold off his holding last year, soon after his exit. It needs to be noted that the stock’s pullback from the peak was mainly linked to the uncertainties that surrounded the blockchain business then, which seems to have been cleared by the SEC after its probe.

The pandemic-driven growth in customer demand, mainly in the key home furnishings categories, is expected to continue in the second half, thanks to the company’s strong partner network and many fulfillment centers. It has been effectively leveraging people’s propensity to spend on home improvement and furnishing during the shelter-in-place.

Resiliance

Since the crisis did not have a material impact on Overstock’s operations so far, the executives are keeping their capital expenditure plan intact. The company has maintained a decent cash flow this year that is sufficient to service its debt.

But the future performance will depend on how the virus situation emerges because continued disruption might impact the already strained logistics activities and also lead to inventory imbalance. Meanwhile, the management is betting high on the company’s blockchain arm Medici Ventures, which has been working on finding remedies for the challenges arising from the coronavirus crisis.

Revenues Surge

Reflecting the mass adoption of online shopping during the COVID period, Overstock’s revenues more than doubled to $783 million in the June-quarter when the core retail division witnessed a spike in sales. There was a three-fold increase in the number of customers by the end of the quarter. Consequently, the company reported earnings of $0.84 per share, which represented a marked improvement from the year-ago period when it incurred a loss.

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Read management/analysts’ comments on quarterly earnings

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After the second-quarter earnings announcement, the stock made steady gains last month and climbed to a record high, continuing the trend seen since the beginning of the year. However, it pared most of those gains since then and slipped to the pre-earnings levels. Interestingly, the shares registered a nine-fold growth in the past nine months alone, after starting the year in single digits.