Post-Earnings Dip is Golden Opportunity to Buy Overstock.com (NASDAQ: OSTK)

Overstock.com NASDAQ: OSTK blew away expectations when it released its Q3 earnings last week; revenue was $731.7 million vs. estimates of $585.6 million, while earnings of 50 cents per share beat estimates of a 2 cents per share loss.

Unsurprisingly, Overstock opened nearly 14% higher on Thursday, immediately following the report. But then, Overstock investors rushed to the exits, and shares closed down more than 13%. On Friday, Overstock shares dropped another 9.82%.

There are a number of possible reasons for the sell-off, but first let’s look at Overstock’s underlying metrics.

Overstock Looks Good Under the Hood

Top-line growth is showing no signs of letting up with new customers increasing 141% yoy. And these customers are increasingly coming back for more. On the Q3 earnings call, CEO Jonathan Johnson said:

“Our new customers in the last two quarters are making repeat purchases at a higher rate than they have in the past 10 years. Their 28-day repeat rate is up 19% year over year. This tells us that new shoppers are not only finding us in products they love, they are having a great experience. This bodes well for retention, something we are especially focused on with these new customers.”

The earnings beat was great news, as Overstock has routinely posted losses. Overstock was able to double its revenue in Q3, but operating expenses increased by a comparatively low 62%.

Turning our attention to the blockchain portion of the business, tZERO, we can see that it continues to expand at an accelerated clip:

• Trading volume on the tZERO ATS increased 20 times compared to the year-ago period.
• It now has over 11,000 users, adding over 2,200 in Q3.
• The newly launched tZERO Markets should lead to a further acceleration of revenue growth in this segment.

So, Why Did Overstock Dip?

It’s important to consider the why for this dip, because it can hint at what path Overstock shares may take going forward. While I don’t pretend to have any definitive answers, here are three possibilities – followed by why you shouldn’t be concerned about each one:

1. Overstock investors decided to take their profits.

There are a lot of Overstock investors that have 1,000%+ gains in less than a year, and this could be responsible for some of the selling pressure.

Why you shouldn’t be concerned: If this is mostly profit-taking, it would mean that shares could quickly turnaround after the weaker hands are flushed out. And there’s already been a lot of flushing…

2. The election is approaching, a stimulus package hasn’t been finalized, and COVID-19 cases are peaking – all leading to a broad sell-off.

Uncertainty permeates the market right now, and we could be entering a prolonged risk-off phase. As a company that is just starting to turn a profit, Overstock is, by some measures, a risky play.

Why you shouldn’t be concerned: Overstock may be risky by some measures, but it’s a high growth company that has the wind at its back. As for the approaching election and stimulus package – which are related matters – Overstock, like a lot of companies, would benefit from something getting done. Fortunately, it is likely a matter of time. And if it doesn’t happen, this isn’t a make-or-break situation for Overstock.

3. Investors were expecting a bigger beat.

Overstock blew away the published estimates, but we don’t know what the whisper numbers were. If investors were secretly expecting much more from Overstock, this would all make more sense.

 Why you shouldn’t be concerned: This is unlikely. It would be more of a possibility if Overstock barely beat published estimates. Furthermore, Overstock soared at the open on Thursday; if the whisper numbers were high, that probably wouldn’t have happened.

Overstock is Excellent Play Going into Winter

This sell-off would make more sense if there was a reason to expect Overstock to struggle in the coming quarters due to new developments. But winter is approaching, and with coronavirus cases peaking, people are going to be shopping online more than ever. And spending more time at home than ever.

Overstock, an online retailer that derives 87% of its sales from home goods, could see its growth accelerate above already high levels. I’d look to get in before more people realize that Overstock’s sell-off didn’t make much sense.