Is Overstock.com Losing Focus?

E-commerce closeout specialist Overstock.com (NASDAQ: OSTK  ) is crashing lower and lower. In three months, the stock has lost nearly a quarter of its market value. In the recently reported earnings statement, the company did see an uptick in sales and order growth, though margin pressure and increased expenses ultimately kept income lower on a year-over-year basis. Overstock.com isn't necessarily a bad business, but it competes with Amazon.com, albeit indirectly. The company trades at much more favorable valuation metrics and does generate appealing cash flow, and management is working hard to generate new, growth-happy lines of business. The question for investors is: Can Overstock overcome the headwinds and realize its potential?

Speeding up or slowing down?
With just 9% sales growth and a 25% jump in sales and marketing expense, Overstock's business doesn't quite fit the profile of a disruptive Internet retailer (well, maybe the high costs). The company's net income was cut in half (from $0.32 per share in the year-ago quarter to $0.16 per share in the just-ended one), and growth overall appears to have stalled, even though management noted a gain in order growth that wasn't made clear in results due to the timing of revenue recognition -- Overstock officially books revenue once product is delivered.

At the same time, the company is making moves to reenergize the business. It recently expanded into pets. No, not just pet care products but actual pets. On Overstock's website, the top left bar reads "Shopping" followed by "OVillage" -- an Etsy of sorts -- and then rather curiously, "Pet adoptions." Overstock.com has partnered with adoption shelters to address what CEO Patrick Byrne calls "[shelters'] Overstock business -- they are in the Overstock pets business." So just as one can buy earrings that didn't make the retail cut, one can now also acquire unwanted animals.

Other recent marketing-led efforts include the acceptance of Bitcoin, a "farmer's market," and most recently -- insurance.

It's too early to make a definitive call, but these somewhat wandering strategies are not relevant to what Overstock.com was originally so successful at: Web-based closeout merchandising. That core concept did and can still differentiate the business from Amazon, yet the company doesn't seem to be further defining it.

A deal or a trap?
As retailing continues its shift to the Web, Overstock is technically in one of the high-growth segments of today's retail segment, but its sales growth rate estimate over the next two years remains in the mid-single digits. The company has missed earnings estimates for three consecutive quarters.

Still, Overstock.com trades at under 17 times forward earnings estimates (somewhat reasonable for the industry and well under Amazon's) and holds an EV/EBITDA of about 12 times. This makes the company cheaper than many of its counterparts, but the discount may just reflect the relative weakness of the business. At closeout prices, Overstock.com could be a value hunter's dream. If the business was poised to pop in the coming periods, it would even be a deal today. But with the current state of the business and no apparent substantial discount to intrinsic value, this one remains a pass.

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