- Overstock’s acceptance of Bitcoins as customer payment could boost profitability over the long term.
- The company has vastly improved fundamentals over the last two years.
- The combination of Bitcoin acceptance, growing popularity of the virtual currency, improving fundamentals make overstock an attractive investment post the latest pullback in price
Overstock (NASDAQ:OSTK), the e-retailer, was among the highest gaining stocks in the bull market of 2013. The stock handsomely outperformed the broader markets with a yearly gain of 120% against the 31% gains by the S&P 500. However, 2014 has been a contrasting story with the stock retreating 36% in the year-to-date against a 2.5% gain in the S&P 500. Our recent article on the E-commerce sector highlighted Overstock’s attractiveness as an investment option against the likes of Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). The recent pullback in price has been significant and raises the question whether the pullback is a good entry point for the long term value seeking investor?
In early January 2014, Overstock announced the acceptance of Bitcoin, which made the bedding to dinnerware online retailer the first major e-retailer to accept Bitcoins. While the fundamental attractiveness of Overstock was established in our earlier post, we today focus on the financial implications and risks associated with this move by the e-retailer.
Overstock: A turnaround nearing completion
Our earlier post on the E-commerce sector showed the improving fundamentals of Overstock, as the company improved its revenue growth even as industry peers Amazon and eBay experienced a slowdown in revenue growth.
A look at the revenue growth charts confirms the belief that Overstock is well on the path to a recovery of sorts. The company has also seen a positive improvement across profit margins, another key fact responsible for driving our positive outlook on the stock.
Our today’s discussion is focused on Overstock’s decision to accept Bitcoins as a mode of payment on its website. Let’s look at the advantages, risks and the financial implications of this move.
Bitcoin: Advantages to Overstock.com
Overstock CEO, Patrick Byrne, in an interview to Fortune made one revelation which could be of particular importance to the company. The transactions done through Bitcoins helps Overstock save 2% in interchange fees. The savings don’t seem much at first. However, if we consider the fact that the company had Net Income margin of 1.3% in 2012 and 6% in 2013, 2% savings in interchange fees could make a significant difference, as that has a direct effect on profitability. While the company is not expected to make any major proportion of its revenues through Bitcoin transactions in the immediate future, the transactions could grow at a rapid rate, given the increasing popularity of the cryptocurrency.
The popularity of virtual currency is on a clear rise, according to a recent post on cnet.com. Coinbase, a provider of digital wallet services, now has 27000 businesses that accept Bitcoins. The company recently passed the one million customer mark, up from 13000 at the start of 2013, and the pace of new additions isn’t slowing down yet. Coinbase co-founder Fred Ehrsam claims adding 5000 customers a day. Whew!! That’s some serious pace.
Bitcoin acceptance: The risks
While Overstock could have expanded its reach and ease by accepting Bitcoins, the move also comes with its set of risks, the biggest of these risks being the volatile nature of the Bitcoin value. The fact that the Bitcoin traded within a one year range of $13 to $1200, in 2013, makes clear the risks associated with it. However, the fact that Overstock.com will convert Bitcoins to Dollars on a daily basis will limit that risk to the one day volatility of the virtual currency.
The Bitcoin acceptance by Overstock comes with its set of positives and negatives. However, the advantages of increased sales in Bitcoins and subsequent impact on profitability could significantly drive the bottom line of a company that has really low profit margins. It will be interesting to see what proportion of total sales will be through Bitcoin transactions over the coming quarters.
Considering the increasing popularity of virtual currencies, the move is a step in the right direction, as long as the company does not hold the Bitcoins in inventory. The long term positive impacts on profitability could be substantial for overstock.com, a fact which can drive the stock higher over the coming quarters. Considering the improving fundamentals of the company and the potential of the Bitcoin advantage, the latest pullback in price could just be the opportunity a long term investor might have been awaiting.
To see Overstock’s latest stock price movement, click here (NASDAQ:OSTK)