E-commerce has been steadily growing and has taken over a larger chunk of retail sales – up to nearly 7% in Q1 2015. E-commerce is trending upwards with just under half a percent of QoQ growth (below). The industry continues to gain traction as consumers are making the shift from brick and mortar retail into online shopping. As a result of this increasing shopping trend, e-commerce companies have been rewarded with rich valuations. Look no further than the absurd valuations of Etsy, Inc. ($ETSY) and Alibaba Group Holding Ltd (BABA) . However, there is value to be found in the space. Overstock.com, Inc. (OSTK) offers investors a way of taking advantage of the e-commerce growth while paying a discounted price.
E-commerce Comparables for Overstock.com
Traditional valuation metrics indicate that Overstock is a bargain when compared to peers. Though margins are below industry average figures, the company’s valuation is not pricing in any potential future growth. Overstock is trading at 0.26x revenue and 5.55x gross profits. Peers, on average, are trading anywhere between 0.2x and 17.49x revenues. The valuation discrepancy is magnified when you take into consideration that Overstock is one of few e-commerce names that are profitable, with an EV/EBITDA of 17.12x. Peers like Etsy are barely breaking even, while others like Wayfair Inc. ($W) are still running at a loss.
Overstock Growth Trends
Revenue growth for the company is still down from its peak in Q2 2013, with Q1 2015 QoQ growth hovering in the high teens range. Part of the reason for Overstock’s slower growth is management’s focus on long-term, sustainable expansion. In the latest conference call, CEO Patrick Byrne explained the company’s commitment to avoiding overspending on marketing to fuel revenues. The company refuses to sacrifice long-term success for unsustainable growth in the short-run. This strategic approach has forced management to expand their product offering to better compete in the industry.
A part of this strategy is the Club O loyalty program. Club O, similar to Amazon’s loyalty program, offers customer perks such as the ability to collect reward dollars and free shipping. The program has seen strong growth, and now makes up about 20% of total sales for the site. The company will continue promotional activities with Club O to continue driving repeat sales, and to build customer loyalty.
Another part of their strategy is the Supplier Oasis Fulfilment Service (SOFS). This platform provides multi-channel fulfillment services to sellers, suppliers, and partners and a single integration point through which partners can manage their products, inventory and sales channels. The program takes advantage of OSTK’s warehousing, allowing them to better utilize their infrastructure to support new revenue streams. SOFS also gives management the ability to expand their website’s selection of goods through the larger distribution network allowing for higher margins on their revenues.
Overstock Offers Downside Protection
Overstock’s “fulfillment partner revenue” makes up the majority of the company’s revenue. Approximately 90% of the OSTK’s sales come from merchandise that it does not own. Acting as an intermediary between the fulfillment partner and the end customer, OSTK is able to minimize risk.
From an investment point of view, the company’s relatively cheap valuation metrics also offer downside protection.
- EV/revenue is at 0.26x (industry average is 5.28x)
- EV/gross profit is 5.55x (industry average is 19.17x)
- EV/EBITDA is 17.12x (industry average is 143.62x)
Slow and Steady Growth Resulting in Misconception
OSTK is committed to long-term organic revenue growth through their online retail business, loyalty program, and internal Supplier Oasis Fulfilment Service. The market’s current demand for hyper accelerated top-line growth in the industry has resulted in OSTK being overlooked. While not reporting the flashy top-line gains of other sites, Overstock is still growing at a mid-teen rate and remaining profitable. The company is well positioned to be a direct beneficiary of the transformational shift happening in the way we do shopping, yet is being sold at clearance prices. Bargain hunters looking for relative value in e-commerce should be taking advantage of this opportunity.
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