Thanks to the novel coronavirus pandemic, Overstock.com (NASDAQ:OSTK) stock has turned into one of Wall Street’s favorite turnaround names, with the home goods e-retailer having run from a $2.50 low in mid-March to a $54 high in July.
That’s a 2,000%-plus gain in OSTK stock in just four months.
Needless to say, it’s been one amazing ride for shareholders. Unfortunately, this amazing ride may be close to its final act.
The reality is that while Overstock represents one of the market’s best turnaround stories, all of that turnaround potential is fully priced into OSTK stock at $50+ prices today. As such, going forward, it won’t be smooth sailing for this online retail stock like it has been over the past four months.
Instead, valuation friction will start to rear its ugly head. As it does, shares could ultimately fall flat around the $50 range for the next few months.
OSTK Stock Is a Great Turnaround Story
In early May, I said that that Overstock represented one of the market’s best turnaround stories.
I’m reiterating that claim today.
Big picture: this beaten-up furniture e-retailer pulled off the perfect transformation at the perfect time.
In 2019, the company got a new CEO, who implemented a multi-faceted turnaround strategy 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 in 2019 took all the right steps to make Overstock a better, more value-driven and more relevant e-commerce platform.
Then, in 2020, the Covid-19 pandemic permanently accelerated e-commerce adoption, and forced consumers across the globe into online selling channels.
When those consumers arrived at Overstock, they were greeted by a platform they liked. There was a modern interface, great prices, a wide product selection and fast delivery times. Everything that a top-tier e-commerce platform should have.
Consumers spent a lot of money of Overstock. Revenues on the site rose 120% year-over-year in April.
They’ll keep spending a lot of money of Overstock, because Covid-19 has permanently accelerated e-commerce adoption in the home goods vertical and because Overstock has improved itself enough to stabilize market share in what will be a booming U.S. home goods e-retail market over the next several years.
OSTK Stock Is Fully Priced
Although I still love the Overstock turnaround story, I no longer love OSTK stock.
For one simple reason: valuation.
At current levels, the OSTK stock price fully prices in robust optimism with respect to the company’s turnaround potential over the next five to 10 years.
My numbers broadly imply that Overstock will be a $4.5+ billion revenue company by 2030, with earnings per share potential of $5 (versus $1.8 billion in estimated revenues this year, and a loss of a buck per share). That assumes the U.S. home goods e-retail market surges over the next decade, Overstock goes from market share erosion in that space to stabilizing market share, and economies of scale kick into to drive material margin expansion.
In other words, I see Overstock growing by leaps and bounds over the next 10 years, but not by enough to warrant a $50+ price tag today.
Based on a consumer discretionary sector-average 20x forward earnings multiple, $5 in 2030 earnings per share implies a 2029 price target for OSTK stock of $100. Discounted back by 8.5% per year, that implies a 2020 price target of $48.
Thus, I see OSTK stock today as slightly overvalued.
Bottom Line on Overstock
It’s been a fun ride for Overstock stock. Shares are up 650% year-to-date, and up more than 2,000% from their mid-March lows.
But all good things must come to an end and it appears that this mega-rally in OSTK stock is in its final stages.
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.