Should You Overstock Your Portfolio?

Overstock.com  (NASDAQ: OSTK  )  has delivered a banner year, with the stock up just under 50% YTD, but the company's shares have seen a pullback of 22.88% over the past month. eBay (NASDAQ: EBAY  ) is up 6.40% over the past year, but down 5.56% over the past month. At the same time, the almighty Amazon.com (NASDAQ: AMZN  ) is up 51.28% over the past year and 14.05% over the past month. Amazon has been the clear winner recently, but is it possible that Overstock is a better investment option than its peers? 

Recent results
In the third quarter, Overstock's net income increased 31% year over year to $3.5 million. This was primarily based on an 18% jump in revenue to $301.4 million, and a 140 basis point improvement in gross margin. Overstock's shift in product mix toward home and garden played a big role, as this led to more sales for higher-margin products. The number of orders increased 2% and the average order size grew 16% to $170.

Sales and marketing expenses increased to 7.5% of revenue versus 5.8% in the year-ago quarter, primarily due to increased spending on sponsored search. The primary focus of these efforts has been Google search. Google is an ever-changing entity that consistently alters its search engine algorithms. Some companies see this as a nuisance, but Google is trying to reward the websites that consistently deliver the highest quality content.

Google's algorithm changes must be on a company's radar or that company could unknowingly hurting itself based on new rules. Google's algorithm changes negatively affected search results for Overstock, which led to slower revenue growth. According to Alexa.com (the global leader in website analytics), Overstock.com's daily pageviews per visitor is down 3.71% to 4.93, and time on site is down 11% to 4:44, over the past three months. Overstock is working on changes and more focused on sponsored search. While this will generate higher revenue growth, it will also lead to higher expenses.

Revisiting the optimistic side of the story, Overstock has a new warehouse in Pennsylvania which will lead to faster delivery on the east coast. Overstock also expects its Club O loyalty program to drive revenue, average order size, and gross profit. Club O costs $19.95 per year and gives members free shipping, 5.25% off, and matching prices on Amazon books plus an additional 15% off.

Speaking of Amazon....

Constant innovation
In the third quarter, Amazon's net sales increased 14% to $17.09 billion. Despite its much larger size than Overstock, it's still growing at a faster pace. Amazon doesn't expect its momentum to slow, anticipating that fourth quarter net sales will increase 10%-25%.

Amazon recently launched a new Paperweight and Kindle Fires. It also deployed 1,382 Kiva robots (mobile robots for warehouse automation – could lead to bottom-line improvements), a new venue for artists, nine original television pilots, and the Mayday Button on Amazon Kindle Fire HDX. These are all impressive moves with potential to drive the top and bottom lines. In regards to the Mayday Button, if you press a button on your screen, you will see a live assistant within 11 seconds. This is a neat feature, unless you're reading a book on the throne and curious to see what that button is all about.

Amazon isn't known as the most profitable company in the world, but its third quarter net loss of $41 million was a big improvement over the $274 million net loss in the year-ago quarter. If Amazon finds a way to be consistently profitable, it would enter Blue Chip status. 

Amazon is exciting, but with the stock trading at 129 times forward earnings and the company sporting a net margin of (0.15%), risk is apparent. Overstock is trading at just 23 times forward earnings and it sports a net margin of 1.90%, but its top-line growth isn't as enticing to investors. Perhaps eBay falls somewhere in the middle, offering a nice balance.

A quiet winner
eBay doesn't attract as many headlines as Amazon, but considering how well it's run, it should. In the third quarter, revenue increased 14% to $3.9 billion with the company seeing strength in many areas:

  • Mobile Commerce Volume: Up 75%
  • Mobile Apps: 3.2 million new customers
  • PayPal Revenue: Up 19% to $1.6 billion
  • PayPal Active Registered Accounts: Up 17% to 137 million

eBay takes an interesting approach to its business. It defines itself as a partner, not a competitor, to merchants, brands, and retailers. This could pay off in a big way over the long haul.

eBay is trading at 16 times forward earnings while sporting a net margin of 17.77%. If you only looked at the numbers and ignored all the hype and noise, eBay should clearly be the safest long-term investment. However, investors love top-line growth:

AMZN Revenue (TTM) Chart

AMZN Revenue (TTM) data by YCharts

The bottom line
Overstock is a solid company with long-term potential, but it doesn't offer as much top-line growth as Amazon and it's not as profitable as eBay. If you want top-line and to go along with market trends, consider Amazon. However, eBay looks to be the safest investment in the group at this point in time.  

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