Overstock.com, Inc. (OSTK - Get Rating) is an online retailer and technology company that offers furniture, home décor, and other related products in the United States and internationally. Apart from providing its products and services through its internet website, the company also focuses on the development and commercialization of financial applications of blockchain technologies through its a fully-owned subsidiary, Medici Ventures and tZero group.

OSTK is one of the best performing stocks in 2020 with record revenue and user base growth. In the second quarter that ended June 2020, revenues increased 109% year-over-year to $782.5 million. Gross profit rose 143% to $180 million compared to the year-ago quarter. tZERO net revenue was $13 million, an increase of 129% year-over-year, primarily due to SpeedRoute trading volume. The Alternate Trading System volume was a record 931,000 shares, registering a 231% increase year-over-year.

With the robust growth in its operations, the stock gained 1,040% year-to-date. However, the potential downside based on a number of factors has made our proprietary system to rate OSTK as a “Sell.”

Here is how our proprietary POWR Ratings system evaluates OSTK:

Trade Grade: D

OSTK is currently trading lower than its 50-day moving average of $86.51 but above its 200-day moving average of $35.78, indicating that the stock is neither in an uptrend nor in a downtrend. However, the stock’s 64.2% gain over the past three months reflects solid short-term bullishness.

OSTK has scaled up in the second quarter by growing its new retail customer base by more than 200% year-over-year. Gross sales were over $1 billion and the orders placed on a mobile device were 51% of retail gross sales. Total number of tZERO crypto app users increased 42% from March, and has doubled year-to-date. However, the company had its first profitable quarter in four years. OTSK is currently trading at a forward P/E GAAP of 391.9x, which indicates that the stock is highly overvalued.

Buy & Hold Grade: D

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, OSTK is positioned unfavorably. The stock is currently trading 37.5% below its 52-week high of $128.50.

Looking at the past three years, the stock has gained nearly 137.7% due to rising digital engagements, and changes in consumer and business behavior amid the pandemic. However, OSTK’s top-line has only increased at a CAGR of 0.4% during the same period.

The spike in the crypto rates in recent years is also favoring OSTK’s growth. tZero group, a majority-owned subsidiary of OSTK, focuses on the development of fintech based on blockchain technologies. It accounts for approximately 95% of security token trade volume and 80% of total token dollar value.

Peer Grade: D

OSTK is currently rated #28 out of 58 stocks in the Internet industry. Other popular stocks in the group are Amazon.com, Inc. (AMZN - Get Rating), Etsy, Inc. (ETSY - Get Rating) and Carvana Co. (CVNA - Get Rating).

OSTK has comfortably beat the year-to-date gains of these industry participants. AMZN, ETSY and CVNA have gained 80.7%, 240.1% and 143.8%, respectively, over this period.

Industry Rank: B

The StockNews.com Internet industry is ranked #4 out of the 123 industries. The companies in this industry concentrate on numerous online business opportunities. Many brick and mortar stores were closed during lockdowns and people resorted to ordering essentials online. Even when they’re-opened, consumers were more comfortable shopping online instead of venturing out. Moreover, people working from home have turned to home improvement projects and the demand for the already booming e commerce has surged.

Overall POWR Rating: D (Sell)

Overall, OSTK is rated a “Sell” due to its stretched valuation, declining online market share amid rising competition, and weak cryptocurrency prices, as determined by the four components of our overall POWR Ratings system.

Bottom Line

OSTK has had a massive run this year, but it’s time to take profits as the stock is being perceived as highly overvalued now.

As the holiday season fades away, traditional retail giants like AMZN will further gain market share, which already has a 30% share of the online furniture market. Moreover, short-term crypto rates are also not in favor of OSTK. So, OSTK may witness price decline in the upcoming months.

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OSTK shares were trading at $78.29 per share on Friday afternoon, down $2.05 (-2.55%). Year-to-date, OSTK has gained 1,010.50%, versus a 9.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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