Overstock Is on Discount

Look for shares of Overstock to perform quite well over the next several years. While Amazon's "trough" was at 0.75 times sales, Overstock's recent low represents a much heavier discount, at less than 0.50 times sales. (Market cap of $440 million divided by $900 million in current year sales.) Using one times sales as a conservative metric, my calculations indicate that Overstock will be worth $92 per share by 2010.

I wouldn't be surprised if the long-term cash earnings power of the Overstock model eventually merits a 1.25 to 1.5 times sales valuation, which would still be a discount to Amazon's 1.8 times sales valuation. This implies a 2010 value of $115 to $139 per share. It's interesting to note that gross margins at Overstock are slightly better and expanding faster than at Amazon.

As discussed above, Overstock is much more capital efficient than Amazon. That is reflected in Overstock's balance sheet, which is in vastly better shape than the balance sheet of Amazon at a comparable point in its history. Also, growth in partner fulfillment (product shipped direct from manufacturer to customer), now at about 60% of revenue, gives Overstock both capital and margin advantages over the Amazon model.

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