One of the top online home furnishing retailers, Overstock.com Inc. (OSTK, Financial), has an interesting story as well as an interesting balance sheet. Founded by Patrick Bryne in 1999, the company has a checkered history of outrageous statements by the CEO, penalties by Alphabet (GOOG, Financial)(GOOGL), failed statium naming rights and controversial cryptocurrency and venture capital investing.
For example, in 2014, Overstock became the first major retailer to accept Bitcoin for payments, and Byrne retired as CEO in 2019 after sending a 1,600-word email, part of which described his romantic affair with a Russian politician.
Despite the colorful history, Overstock's business is solid and could even be called boring. The core business primarily involves selling home furnishings and accessories such as bedding, furniture, rugs, small kitchen appliances, dishware and bathroom accessories. Other areas it covers include items such as pet supplies, outdoor accessories and jewelry. Much of the products sold are close-out merchandise from other sources, but many of the products are also procured new from various manufacturers.
The company went public 2002 at $13.00 per share, and the stock price has seen wide fluctuations over the years. The stock dropped as low as $5.00 during the initial Covid-19 sell-off but rebounded quickly as the lockdown-driven online purchasing and the home improvement boom took hold in late 2020 and early 2021. Now it's down again thanks to high inflation, showing remarkable volatility:
Competition
According to Overstock, they are the fourth-largest online home furnishing seller after Amazon (AMZN, Financial), Wayfair (W, Financial) and Walmart (WMT, Financial). The company believes they have a unique competitive position in the value and expertise space. Other competitors such as Wayfair or Restoration Hardware (RH) tend to compete in the higher priced, or upscale markets, while Overstock is focused on the lower price spectrum.
In 2021, nearly all of the retail sales through the company’s various websites were from transactions in which they fulfilled the orders through a network of approximately 3,000 third-party manufacturers, distributors and other suppliers.
Substantially all of the company’s total sales are made in the U.S., though part of the company’s growth plan is to expand into Canada. Other growth drivers include increasing mobile app adoption and increased brand recognition that is associated with home goods.
Medici Ventures
Aside from its core business, Overstock has another potential long-term growth driver: its investments in cryptocurrencies. Launched in 2014, Medici Ventures was a vehicle for Overstock to invest in various blockchain technologies and cryptocurrencies.
Medici Ventures’ companies introduce blockchain technology to industries in the areas of identity, land governance, banking, capital markets, supply chain and voting. One of the most recognized holdings is tZero, an alternative broker-dealer that deals with digital assets and other private company transactions.
In 2021, venture capital firm Pelion acquired control of Medici and its blockchain assets. As a result, Overstock became a limited partner and deconsolidated the financial results of the venture. The value of this partnership and related entities was recognized on Overstock's balance sheet at $342.8 million on Dec. 31, 2021.
Recent financial results
Overstock's revenue grew 10.5% year-over-year in 2021, which was impressive when considering 2020 revenues increased over 73% due to the Covid-19 lockdown and home improvement boom seen across most of the country. The home-related sales mix improved to 94% for the year. Ebitda margins increased 40 basis points and operating income increased 15%.
Free cash flow from continued operations has been positive in the past two calendar years at $84.4 million in 2021 and $211.7 million in 2020. The company’s balance sheet remains very strong with cash and equivalents of $503 million at year-end and debt of only $38 million.
Equity securities, which is primarily Medici Ventures, totaled $342.7 million. However, those securities carry volatility and great uncertainty with regards to future values, which may have also contributed to Overstock's sharp share price decline in 2022.
Valuation
There is a wide variability of valuation calculations for Overstock depending on how the cryptocurrency equity securities are valued. On the basis of earnings per share, analyst estimates call for EPS of approximately $2.37 for 2022, so the stock is trading at a current price-earnings ratio of 17.
If we calculate the enterprise value by subtracting cash and equity securities from the market cap and adding the debt, the current enterprise value is approximately $933 billion. Wall Street analysts' Ebitda estimates for 2022 call for approximately $150 million, which would put the enterprise-value-to-Ebitda ratio at 6.2. On a Price-sales basis, the company is selling at only 60% of estimated revenues for 2022.
Guru trades
Gurus who have purchased shares of Overstock recently include Chuck Royce (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio). Gurus who have reduced or sold out of their positions include Lee Ainslie (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
Conclusion
Overstock appears to be undervalued, in my opinion, as it recreates itself with more branding and technology initiatives and has exposure to cryptocurrency. The company continues to grow market share in the U.S. and increase profitability. Canada is the next region where the company hopes to recreate their domestic success.
In addition, Overstock has a built-in option to create significant value for shareholders through its partnership arrangement with Pelion pertaining to the Medici Venture investments. If value is created with these venture investments through accessing the public markets or an M&A transaction, this could meaningfully return cash to shareholders.
