Overstock.com (OSTK) announced the launch of Houserie, adding real estate to its alternative businesses. The announcement and launch are part of an initiative to build out real estate offerings under the umbrella O Real Estate, all which will be alternative businesses to its retail business and categorized as "other" among its company’s operating segments.
The real estate business will provide another channel for helping support earnings for the company. In late 2014, the company began building out Medici, which operates tZero, a blockchain trading solution, as well as other blockchain investments.
Overstock outlined some of its alternative business investments in its first-quarter earnings report:
In late 2014, we began working on initiatives to develop and advance blockchain technology, which we refer to collectively as Medici. As part of our Medici initiatives, we have formed a wholly-owned subsidiary Medici Ventures, Inc. ("Medici Ventures") and acquired a majority interest in a financial technology company and two related registered broker dealers which are owned by our majority-owned subsidiary tØ.com, Inc. ("tZERO"). In 2018, tZERO acquired a majority-ownership interest in a registered investment adviser entity and an accredited investor verification entity. Medici Ventures has also purchased minority interests in several blockchain technology companies. In 2015, we were the first public company to issue a private security using blockchain technology and in December 2016, as a demonstration of our technology, we issued publicly traded blockchain preferred shares of Overstock.com, Inc.
The alternative businesses have been a primary growth driver for the company as its retail business operates in a challenging environment with competitors such as Wayfair (W, Financial), Walmart (WMT, Financial), Amazon (AMZN, Financial) and eBay (EBAY, Financial).
Real estate business
On July 23, Overstock announced the launch of property management site Houserie. Houserie is an online real estate service that provides landlords with support for tenant screening. The website allows landlords to screen using three packages that range from $29.99 to $19.99 with the full access package including the following: identity checks, national criminal, sex offender search, national eviction search and comprehensive credit scorecard.
Houserie will also provide landlord resource content through its blog. According to the press release, Overstock also plans to add the following: communication with renters, organization of resident information and rent payment management. These add-ons will be part of its broader real estate initiative called O Real Estate, which the company plans to launch in September 2018.
Given Overstock’s investment in crypto and bullish perspective on the currency, it is likely the real estate platform could incorporate crypto payments in the future and also leverage blockchain technologies. The company already operates blockchain technology platform tZero, has made investments in crypto and blockchain through Medici and could now seek to be a market innovator in the real estate/blockchain category. Overstock’s first-quarter 2018 10-K also reports that it has taken a large stake in Verify, which does investor screening and could be another avenue for comprehensive growth.
In February 2018, Overstock made two acquisitions to support its real estate initiatives. It bought real estate assets from Rental Roost for $500,000. It also bought out Houserie for $100,000, which was part of an acquisition deal with Rental Roost.
Other
Other has been a strong driver of revenue for Overstock. In the first quarter of 2018, the segment reported revenue growth of 23% versus retail growth of 3%. Operating expenses for the other business also increased 385% to $22.7 million.
Partner retail growth showed a 5% growth rate while direct retail growth was down 29% from the first quarter of 2017. According to the company’s filing, partner revenue is derived primarily from merchandise sales of inventory sourced through partners while direct revenue comes from sales generated from owned inventory by the company. As the direct and partner businesses see challenges in a tough market environment, the further build out of online solutions for blockchain, cryptocurrency, real estate and screening could be important contributors.
Business projections
In total, Overstock paid $600,00 for the two real estate acquisitions. Looking at some comparable companies to get an idea of the potential revenue for these two businesses, it seems the closest comparables would be Zillow (ZG, Financial) and Equifax (EFX, Financial). Zillow provides similar property listing services to Rental Roost. Equifax reports about 25% of its total revenue from online information solutions. Over the trailing 12 months, Zillow has total revenue of $1.1 billion while Equifax has total revenue of $3.4 billion. Thus, the forecasted value of the stock incorporates these assumptions when finding the discounted cash flow value below.
Alpha opportunity
Overstock’s Retail business has been challenged by strong competitors in Wayfair, Walmart, Amazon and eBay. Its Medici business has been growing and it seems the acquisitions of Rental Roost and Houserie could substantially help the business overall. The company’s second-quarter earnings on Aug. 1 and further launch of O Real Estate later in the year will be important to watch as Overstock begins its real estate initiative. Analysts’ estimates factoring in these two businesses in the second quarter and beyond will also be interesting.
DCF valuation
Given bullish case assumptions, which assume that Overstock could match the correlated revenue of Zillow and Equifax’s online information solutions, it seems that Overstock.com's stock could return 107% over the long term. Assumptions for the DCF valuation include the following:
- Weighted average cost of capital: 11.57%
- Growth of free cash flow: 10 years
- Terminal growth: 3%
With these assumptions, the stock has a DCF of $75. This gives it upside of 107% at its current trading value of approximately $36.
Disclosure: I own shares of Overstock.com.
