Overstock (OSTK, Financial) has been gaining on some positive developments in the weeks leading up to its recent earnings report. Near the end of July, the firm launched Houserie, a newly revamped acquisition that is the first rollout in a series of plans for its O Real Estate initiative. Subsequently, it announced several deals through its Medici fintech business for blockchain developments. The firm also closed its tZero cryptographically secured token offering, capped off with a $1.5 billion investment from GSR Capital.
Fintech business innovation
Overstock is building out a unique array of businesses that are based on a variety of fintech channels. The firm’s Overstock.com offers an inventory of goods for online sale and delivery. This aspect of the business now makes up a small portion of the revenue. It competes in a challenging market with competitors such as Wayfair (W, Financial), Walmart (WMT, Financial), Amazon (AMZN, Financial) and eBay (EBAY, Financial), which are also limiting its growth.
As the market for online retail becomes more constrained, the firm has sought to innovatively expand into the areas of blockchain, crypto and real estate. In 2018, it is one of only a few publicly traded companies that has seen substantial success in these alternative areas. Early to market for a publicly traded company in blockchain, it was the first to issue a private security in 2015 using blockchain technology and one of the only companies to ever issue a publicly traded blockchain preferred share (OSTKP, Financial) in December 2016.
Second quarter results
In the second quarter the company saw revenue increase 11.8% to $483.13 million with earnings per share of -$2.20. The after-market earnings release on Thursday, Aug. 9, helped the stock to gain 7.9% or $3.05 on Friday to $41.65.
Revenue
Revenue of $483.13 million increased from $432.02 million in the second quarter of 2017. The second quarter’s revenue helped bring revenue for the year to $928.5 million an increase of 7.4% or $64.0 million from the first half of 2017.
For the first half of the year, Direct revenue, primarily from Overstock.com platform sales, was 3.3% of total revenue at $31.0 million, down from 5.2% in the first half of 2017. Partner and Other accounted for 96.7% of revenue at $897.5 million, up from 94.8% in 2017. In the first half of the year Direct revenue was down 31% while Partner and Other revenue increased 9.5%.
Earnings
In the second quarter, Overstock reported a consolidated net loss of $65.9 million. Loss per share attributable to stockholders were $2.20. The earnings loss deepened by $57.4 million in the second quarter and by $102.4 million for the first half of the year.
Gross profit margins were steady in 2018 with no major increases in direct expenses. Indirect operating expenses for the business were the biggest factor for the bottom line, driven by sales and marketing expenses. Sales and marketing expenses for Overstock nearly doubled in both the comparative quarter and the first half of the year. As such, sales and marketing was the primary factor leading to the firm’s second quarter earnings per share loss.
The higher sales and marketing expenses were the result of a number of factors. According to the firm’s second quarter release it increased advertising and had a $6.3 million increase in staff-related costs across all businesses and a $600,000 expense related to tZERO equity awards. Sales and marketing expenses are expected to be reduced through the remainder of the year.
Return and future value
Analysts have been steadily increasing their price targets for the stock with an average one-year price target now at $103. At this target the price is expected to more than double in value in just one year. All of the firm’s major initiatives across O Real Estate, Medici and tZero are expected to be the main catalysts while the Overstock.com direct platform business is estimated to see minimal growth.
Year to date the stock is down 34.82%, but in the last month it has gained 10.92%. Its one-year return is at 115.8% with three-year and five-year annualized returns at 23.94% and 6.85%, respectively. For the one-year and three-year periods the stock has been substantially outperforming the S&P 500 with a beta of 1.52.
Disclosure: I own shares of Overstock.
