An Analysis Of Overstock.com OSTK
Below is a MRR and PLR article in category Finance -> subcategory Stock Market.
A Comprehensive Analysis of Overstock.com (OSTK)
Why Overstock.com Might Be a Value Investment
Value investing involves identifying companies trading for less than their intrinsic worth, essentially "dollars for fifty cents." At first glance, an unprofitable internet company like Overstock.com (OSTK) might not seem to fit this bill. However, with its market cap at less than 75% of sales, Overstock presents a compelling case.
Assessing Risk
The core risk in any investment is overvaluation. So, what exactly is Overstock worth? I estimate it at around $1.5 billion, compared to its current market cap of approximately $500 million. Let's delve into my rationale and assess the validity of these assumptions.
Key Assumptions
1. Cash Flow Neutrality
I assume Overstock will neither generate significant free cash flow nor deplete cash over the next five years, essentially maintaining a neutral cash flow margin. While cash flows won't perfectly offset, the real question is whether Overstock can produce some free cash flow in this period. Given its steady revenue growth and solid gross margins (13.3% in 2004, improving to 14.9%), it seems plausible. Although SG&A expenses are high, they likely won't outpace revenue growth.
2. Sales Growth
I'm projecting a 15% annual sales growth over five years. Ecommerce is expanding rapidly, and Overstock's historical revenue growth (over 100% in 2003 and 2004) supports this assumption, even with recent slowdowns. Rising consumer awareness and increasing website traffic bolster this outlook, making a 15% growth rate reasonable.
3. Free Cash Flow Margin
Assuming Overstock can achieve a 3% free cash flow margin six to ten years from now, increasing to 4% thereafter, mirrors models seen in successful peers like Amazon. Though Overstock's margins are currently lower, effective cost management could align with this target over time, particularly with expected sales growth.
4. Long-Term Sales Projections
I anticipate sales growing 12% annually in six to ten years, 8% in eleven to fifteen years, and 4% beyond fifteen years. This projects Overstock’s sales to reach $6.90 billion by 2036, which is reasonable even with inflation adjustments factored in.
Conclusion: A Potential Value Buy
Combining these assumptions, my valuation places Overstock at $1.5 billion. With the market offering it at just $500 million, Overstock stands out as a potential opportunity for value investors willing to consider unprofitable internet stocks.
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