An Analysis Of Overstock.com (OSTK)

Why can be a benefit buyer writing about an unprofitable internet organization? Simply because benefit investing is about acquiring dollars that trade for fifty cents; using a industry cap of much less than 75% of sales, Overstock.com (OSTK) looks like it might be exactly that.

But isn’t it too risky?

The greatest risk in any investment is the risk of overpaying. So, the genuine question is: what exactly is Overstock worth? I believe it is really worth a minimum of $1.5 billion. With Overstock’s marketplace cap at present sitting around $500 million, my valuation certainly seems far fetched. But, there’s only 1 method to know for sure. Let’s take apart my argument piece by piece, and see if any of my assumptions are unreasonable.

Very first Assumption: Above the next 5 several years, Overstock will neither produce genuinely free cash flow nor consume money. In other words, its totally free money flow margin will average 0%. Money generation in some many years will specifically offset hard cash consumption in other many years. Obviously, this assumption is unreasonable, because there’s practically no chance the money flows will precisely offset.

That is not a problem if it turns out Overstock does generate some totally free money flow over the next 5 several years. In that case, my assumption basically errs for the side of caution. If, however, it turns out Overstock in fact consumes cash more than the subsequent five years, there is an issue – possibly a very huge issue. So, which scenario is a lot more likely?

Overstock’s revenues are growing swiftly. Gross margins look solid at 13.3% in 2004 and 14.9% above the final twelve months. Overstock’s unprofitability could be the result of its promoting, general, and administrative expenses (SG&A) which are already growing exponentially. Will these expenses continue to grow? Yes, but not as fast as revenues. More than the last twelve months, Overstock’s spending on cap ex has been 5.6% of sales. That number is an aberration. Within the lengthy run, spending on cap ex ought to not exceed 3% of sales. Considering the business Overstock is in and the expected sales growth, the company will, a lot more likely than not, create some free of charge money flow above the next 5 years. Therefore, the assumption that Overstock will be money flow neutral more than the following 5 years is not overly optimistic.

Second Assumption: More than the following 5 many years, Overstock’s sales will grow by 15% annually. Is this an unreasonable assumption? Again, I don’t consider it’s. Really handful of industries are expected to grow as fast as eCommerce. Overstock’s revenue growth in 2003 and 2004 was over 100%. Inside the past year, that growth has slowed. Nonetheless, it is even now closer to 50% than it is always to 15%. Overstock isn’t in the cyclical business. So, there is no purpose to believe current sales are abnormally high.

Also, all that spending on advertising is increasing consumers’ awareness of Overstock. A review of Overstock’s traffic data shows it has not only been gaining more visitors; it has also been climbing the ranks of the most popular web sites. While it is a lengthy, long way from the Amazons, Yahoos, and eBays of the world (and will never reach individuals heights) Overstock is becoming a well known web destination. This fact was most clearly evident in the weeks leading up to Christmas. Shoppers who visited Overstock throughout the holiday season obviously know it exists, and may possibly very well return at some other point in the year. Analysts are predicting extremely high growth rates for Overstock; however, they are also recommending you market the investment. I do not put any weight in their estimates. But, for the other factors given, I think the assumption that Overstock will grow sales at 15% a year for the following 5 several years is not unreasonable.

Third Assumption: Six to ten several years from today, Overstock will have a free of charge cash flow margin of 3%. Ten several years from today, Overstock’s free of charge hard cash flow margin will rise to 4% and remain at that level. Now, of all the assumptions I’ve made, this one may be the most questionable. Certain, Amazon has that kind of free of charge hard cash flow margin, but Overstock isn’t Amazon, and it never will be Amazon. Overstock’s gross margins are less than Amazon’s. In fact, Overstock’s gross margins are less than Wal – Mart’s. However, Overstock’s fixed costs will eat up a a lot smaller portion of its sales than may be the case over at Wal – Mart.

In case you compare Overstock to other online retailers, you will see that if Overstock does experience strong sales growth, a 3% totally free money flow margin six several years from now just isn’t unreasonable. I assumed Overstock’s sustainable free of charge cash flow margin will be 4%. There’s a case being made that 4% is too high. I won’t make that case, because I don’t feel in it. Remember, that 4% number comes ten several years out. That gives Overstock plenty of time to grow sales and thus reduce SG&A as a percentage of sales.

Fourth Assumption: Six to ten many years from today, Overstock will be growing sales by 12% a year; eleven to fifteen years from today, Overstock will be growing sales by 8% a year; thereafter, Overstock will grow sales by 4% a year. Let’s see what this actually means. According to these assumptions, Overstock’s sales will be as follows:

Today: $707 million

2011: $1.59 billion

2016: $2.71 billion

2021: $3.83 billion

2026: $4.66 billion

2031: $5.67 billion

2036: $6.90 billion

Seven billion dollars is not an unreasonable target – for those who have thirty many years to achieve it. To put that figure in perspective, Amazon.com at present has sales of about $8 billion. So, even following thirty years, these assumptions do not lead to Overstock reaching the same size as today’s Amazon. Don’t forget these numbers assume some inflation. For instance, if inflation averages 3% a year more than the next thirty years, Overstock’s projected $6.90 billion in sales only translates to $2.84 billion in today’s dollars. So, these assumptions only lead to a fourfold increase in Overstock’s real sales over a period of thirty several years. I think that’s pretty reasonable.

If you take these four assumptions together, you get a benefit of $1.five billion for Overstock. Today, Mr. Industry is offering it for $500 million – that’s why I’m writing about an unprofitable web business.

You can find more information about day trading picks, nyse stock prices, and today stock prices