Does Overstock.com Have Investment Value?

Overstock.com (NASDAQ: OSTK  ) endured a 37% stock decline in 2013, as its e-commerce business lacked the flare of peers like Amazon (NASDAQ: AMZN  ) and eBay (NASDAQ: EBAY  ) . Overstock.com remains an under-the-radar and rarely celebrated company in this space, as it does not possess a PayPal or Amazon Web Services to drive growth. Regardless, following its decline, Overstock.com might present a good investment opportunity.

It doesn't have the growth
Overstock, with $1.3 billion in revenue last year, is a significantly smaller company than peers Amazon and eBay. Theoretically, it should be able to grow year-over-year sales at a faster clip, since such performance is easier for smaller companies with a larger market to penetrate.

Yet in 2013, Overstock.com saw total growth of 19%, and in the fourth quarter, that metric declined to only 16%. In comparison, Amazon finished the year with total revenue of $74.45 billion, growth of 22%, year over year; eBay grew just 14%, but with $16 billion in annual revenue, its double-digit growth is still considered a positive.

It doesn't have the edge
In addition to not having impressive growth, Overstock.com doesn't have an edge that provides safety or gives it a competitive advantage over its peers.

eBay obviously has PayPal, which accounted for 41.3% of the company's total sales, and grew 19% last year. It is among the most dominant payment-processing companies, with 143 million users, and according to Reuters, this business is worth $40 billion, or 60% of eBay. Therefore, because of PayPal, eBay's e-commerce marketplace growth of just 12% is overlooked, and that gives the company an edge.

Amazon has AWS, which sells cloud services in cloud infrastructure, laaS, and app platforms, PaaS. In both segments, Amazon is a market leader, and according to research firm Macquarie, AWS will grow from $3.8 billion last year to $8.8 billion in revenue by 2015. As a result of this growth, the valuation for AWS is quite high -- approximately $50 billion, according to Evercore.

While AWS is still relatively small compared to Amazon's total business, it is still a valuable edge the company owns to complement its much larger core business, which is something Overstock.com lacks.

But it does have value
Despite Overstock.com's lack of growth or an operational edge, the one thing it does own is value relative to its peers.

Overstock.com is a company that's very quietly improving, clearly in sales, but also in margins, as its gross margin increased 90 basis points to 19% in 2013. Also, with a very similar business model, Overstock.com's operating margin is 23% higher than Amazon.

In comparison to Amazon, Overstock.com trades at a very attractive 21 times next year's earnings; Amazon trades at an 80 times multiple. Also, Overstock.com is valued at just 0.36 times its 12-month sales, while Amazon trades at a much steeper 2.1 times sales.

With that said, eBay is cheaper based on earnings, with a forward P/E ratio of 16.2. But it also trades at 4.5 times sales. The reason is because of its operating margin of 21%, driven almost solely by PayPal. Still, eBay's margins have been flat the last two years. Meanwhile, Overstock.com has seen margin improvements in each of the last three years. Overall, this signals value in Overstock.com, which could indicate a stock with upside.

Final thoughts
Looking back, 19% annualized growth is not bad. It's comparable to Amazon and far more impressive than eBay's marketplace growth. Yet despite this growth, Overstock remains a very cheap stock, and it's worth noting that it has done well in driving higher order sizes, up 13% in the last quarter.

Overstock.com is performing nicely. It may not have the glamor of Amazon or eBay, and it may never become a $50 billion company, but with a market cap of only $460 million, investors might find a good opportunity for gains looking ahead.

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