Overstock Will Continue to Push Higher As Positive Cash Flow Surges

Overstock.com (NASDAQ:OSTK) has been on a serious upswing this year. In the past year, OSTK stock has risen over 426% as of the end of October. Moreover, in 2020 year-to-date the stock is up more than 700% to nearly $60 per share.

Source: Burdun Iliya / Shutterstock.com

This incredible return has been driven by purchases of its bargain goods online. On Oct. 29, the company reported that its Q3 revenue was up 111% year-over-year to $732 million.

Things are going pretty well at Overstock. But can this continue?

Fantastic Finances

Overstock’s gross profit margin ratio rose to 23%, or up 3.3 percentage points from last year. This led to a positive net income of $23 million which was up $54 million from losses last year.

But even more importantly the Overstock’s free cash flow (FCF) remained positive for the second quarter in a row. It was $22.6 million in the third quarter. This represents a conversion of net income into FCF of just about 100%.

To put it simply, people are buying the hell out of their goods. In fact, the company said in its earnings report it faced capacity challenges, including with shipping carriers, suppliers and keeping its top-performing goods in stock.

That is a sign of a company with strong retail demand, a good problem to have in normal circumstances. Nevertheless, the company said this about its capacity issues:

“Nevertheless, the challenges arising from the pandemic have not adversely affected our liquidity, revenues, or capacity to service our debt, nor have these conditions required us to reduce our capital expenditures.”

This hasn’t stopped Overstock from making positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $40 million in Q3 and $65 million year-to-date. This is significantly better than its loss of $54 million in EBITDA in the same period last year.

Overstock’s Valuation

Right now, OSTK stock has a market capitalization of $2.4 billion, but it also has $529 million in cash on its balance sheet. Since its debt is only $42 million, its net cash is $487.6 million. Therefore, its enterprise value (EV) is $1.912 billion.

As a result, Overstock has a cheap EV-EBITDA ratio. For example, its $40 million in Q3 adjusted EBITDA works out to $200 million on a run-rate basis. That means Overstock has an EV-EBITDA multiple of just 9.6 times.

Moreover, analysts’ estimates for next year have a very wide range. Therefore, it is not really possible to gauge the value of OSTK stock based on price-earnings. I suspect many of them are wondering whether this huge uplift in earnings and cash flow will continue.

However, many believe that the homebound retail and consumer online activity, which is the basic cause for Overstock’s sales increases, might not continue.

I tend to disagree with that. The restrictions are likely to ingrain new behavior and spending patterns. This will lead to a higher permanent level of retail activity with online bargain sites that have a good brand name like Overstock.com. This also leads to a higher valuation for the company.

For example, Wayfair (NYSE:W) now trades for $23.66 billion in market cap. As it has $366 in net cash, its EV is $23.274 billion. Based on its latest quarter (Q2), the run-rate EBITDA was $1.474 billion. Therefore, W stock trades for an EV-EBITDA multiple of 15.76x.

That implies that OSTK stock is worth 64.2% more, as its multiple is only 9.6 times. That puts its value at $92.11 per share.

What To Do With OSTK Stock

Analysts tend to agree with my higher than present price target. For example, Yahoo! Finance reports that six analysts have an average price target of $101.33 per share.

Similarly, TipRanks.com reports that five analysts who have written on OSTK stock in the past three months have an average target of $101. So there seems to be a consensus that it is worth much more than today’s price.

Despite the rise over the past year, it looks like the company will continue to do well. Its move into positive free cash flow and positive EBITDA bodes well for a much higher valuation.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.


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