Overstock.com (NASDAQ:OSTK) stock could rise up to 50% from here by 2021. This assumes its enormous turnaround continues, Christmas is a blowout and its free cash flow (FCF) keeps rising. But if these happen, there seems to be a good likelihood Overstock.com stock could hit $102.65 based on my forecast.
I base this on the continued FCF progress the company made with its Q3 financials. For example, earnings were positive for the second quarter in a row. On Oct. 29, the company reported $21.2 million in net income on revenue of $731.7 million, up 111% year-over-year.
That represents a net income margin of 2.9%. This was down a bit from the prior quarter’s 4.5% margin, but that included a large at-home buying activity change.
Free Cash Flow Forecasts
However, more importantly, Overstock.com remained FCF positive during Q3. This is the basis of my optimism, as typically the company has not produced large FCF profits.
For example, in Q3 Overstock.com made $22.6 million in FCF. That means it converted more than 100% of its net $21.2 million income into FCF. The conversion ratio was 107% (i.e. $22.6 million divided by $21.2 million). We can use that to project its future FCF.
Assuming revenue continues stampeding higher, we can estimate that it reaches $2.9 billion to $3 billion on a run-rate basis. That is significantly higher than analyst estimates right now, but I think it is possible, as analysts have been consistently wrong on this stock.
Therefore, using a 4% net income margin and a 110% conversion ratio, FCF could hit $132 million over the next year. That is lower than this year, but most of the year-to-date $291 million in FCF was from one-time working capital effects in Q2. That occurred because receivables overwhelmed payables as the company’s sales ramped up.
Estimating Overstock.com’s Valuation
Here is where the rubber meets the road. Using the $132 million FCF assumption, and applying a 3% FCF yield, its market capitalization would be $4.4 billion.
That represents a 50% gain over today’s $2.93 billion market cap. In other words, the stock would rise from $68.43 as of Nov. 26 to $102.65. Let’s call it $103.
You might be wondering why I use a higher net income margin of 4%. Two reasons. First, Q2 had a 4.5% margin, vs. 2.89% in Q3, so this is a little over the mid-point.
But I also assume that the company is getting more efficient, cutting out spoilage, reducing costs, and benefiting from scale as sales rise. That ends up raising its net income margin.
The same is true of the FCF margin estimate that I use.
Therefore, we can expect that Overstock.com looks like a bargain here, with the prospect of rising another 50%.
What To Do With Overstock.com Stock
Overstock.com hit a peak of over $122 in late August, and then the stock tanked for a while. Now it seems to be recovering, especially since the Q3 revenue and earnings report. It showed that consumers were still upping their Overstock.com buying online.
That is another reason why I believe that a $103 price target for the stock is not out of the question by 2021.
By the way, I am not the only one with this forecast. For example, TipRanks.com reports the average price target is $101.00 for five analysts who have written up Overstock.com stock in the past three months. In fact, the highest forecast is for $140 per share.
Marketbeat.com reports a similar consensus price target from 6 analysts who cover the stock. Their target price average is $101.33 per share, very close to my $102.65 estimate.
With my target price, you can see how to derive a simplified model for the company’s valuation. This brings up an important point about investing.
Always have a target price in mind when you buy. That way you can judge how potentially profitable your investment will be worth. It also helps you set a buy price target.
For example, if you have a potential 50% return, you can be more liberal, so to speak, about buying as the stock rises. You know how much your potential return can be as you average cost with your buy price.
The potential for a 50% return with Overstock.com stock represents a very worthwhile ROI for most investors.
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.
