Once left for dead as a failed e-commerce company that made a costly and ill-advised jump into the blockchain world at the wrong time, Overstock.com (NASDAQ:OSTK) has come roaring back to life amid the novel coronavirus pandemic. From it’s mid-March lows, Overstock.com stock is up a jaw-dropping 5,500%.
Why the huge rally? Because the future is getting brighter for Overstock.com by the day.
That is, amid Covid-19, physical stores across the globe have closed their doors. Commerce activity has migrated into the online channel. This has created huge tailwinds for Overstock.com, whose revenue growth rates have reversed course from down 19% in the fourth quarter of 2019 to up 120% in April.
You read that right. In a matter of four months, Overstock.com has gone from -20% to +120% revenue growth.
Sure, you could write this off as a one-time phenomena, brought on by a once-in-a-lifetime Black Swan event in a global pandemic. But it’s not. This is a seminal moment in the retail industry, which will permanently accelerate the e-commerce transition and push previously offline-heavy retail categories into the online channel for good.
One of those offline-heavy retail categories is home goods. Overstock is one of the five major players in the U.S. furniture e-retail market.
It doesn’t take a rocket scientist to connect the dots. Overstock.com is on the cusp of breakthrough growth over the next few years, the likes of which will drive OSTK materially higher from current levels.
A Seminal Moment in Retail
Make no mistake. We are in the midst of a seminal moment in the global retail world.
The e-commerce revolution was already under way before Covid-19. Globally, e-commerce sales rose by more than 500% from 2010 to 2019, and accounted for about 14% of total retail sales last year (up from less than 2% at the start of the decade). Still, the e-commerce wave of the 2010s wasn’t all-inclusive. Certain verticals were left behind, like small businesses (among whom nearly 40% didn’t have an online presence prior to Covid-19) and the home furniture market (which had just 14% e-retail penetration in 2019, versus 30% for apparel and 43% for consumer electronics).
Because of Covid-19, those verticals are going to play catch-up over the next few years, and spark the next big wave of the e-commerce revolution in the 2020s.
That’s great news for Overstock.com. The company is the fifth-largest furniture e-retailer in the U.S. So long as the company can sustain its positioning in this market, then the company’s 120% revenue growth rate in April will extend into double-digit growth for the next several years.
Overstock’s Retail Turnaround
I have confidence that Overstock can sustain its positioning in the furniture e-retail market, because the company is in the midst of a robust turnaround which will continue to drive share stabilization.
Long story short, Overstock.com has been the eyesore in a surging e-commerce market for a long time. The company’s share of the U.S. furniture e-retail market has slipped from 8% in 2015, to just over 3.5% in 2019.
But, last year, the company got a new CEO, and implemented a three-pronged turnaround plan built on improving the platform’s search relevancy, enhancing the mobile web experience, expanding the product’s content on the site, leveraging data to improve pricing strategies, optimizing logistics for shorter delivery times, and introducing free shipping on everything.
In short, management has taken all the right steps to make Overstock.com a better, more value-driven and more relevant e-commerce platform.
The numbers speak for themselves. Revenue growth rates have consistently trended higher every quarter since the second quarter of 2019. Gross margins have ticked up every single quarter since the second quarter of 2019, too. And contribution margin has risen at a steady pace, as well.
I believe that Overstock can and will leverage its platform improvements to stabilize market share around 3.5% over the next several years. If so, then Overstock.com stock is well positioned to ride secular e-retail market tailwinds to the tune of 10%-plus revenue growth for the next few years, too.
Overstock to Reach $100?
The best thing about Overstock.com stock is that, despite robust growth potential over the next few years, essentially zero growth potential is priced into shares today.
That’s because everyone wrote off this e-retailer as “left for dead” in early 2020. But since then, everything has changed. And as the “left for dead” reality turns into a hyper-growth reality, Overstock.com stock will fly higher.
My modeling suggests that Overstock will grow revenues at an approximately 10% compounded annual growth rate between now and 2030, paced by 10%-plus U.S. furniture e-retail market growth. Increased revenue scale should drive continued gross margin improvements to 25% or higher. Opex rates will drop back down to below 20%, or where they were back when Overstock was a growing company around 2015 to 2016.
If all that happens, then the numbers suggest that $5 in earnings per share is doable for Overstock by 2030. Based on a 20-times forward earnings multiple — which is about average for technology stocks — that implies a 2029 price target of $100.
Yes. You read that right. In an “everything goes right” scenario, Overstock could fly from $15 today, to $100 by the end of the decade.
The Bottom Line on Overstock.com Stock
Overstock is a one of the market’s most compelling turnaround stories at the current moment. Assuming this company can leverage recent platform improvements to sustain share in what projects to be a booming U.S. furniture e-retail market over the next few years, then Overstock.com stock could be on track to hit $100 within the decade.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.