It’s a funny thing, but when you change the way you look at something — the thing itself can change.
Take Amazon (NASDAQ: AMZN), for example.
Investors looking for giant margins and profits are frustrated that the company is not making more money. As revenge, the market pushed the stock down more than 10% last week and 19% so far in 2014.
But think about it this way for a second: What if Amazon is being run not as a public company but rather as a private company? Perhaps the focus is on long-term metrics rather than quarterly earnings…
When you think about it, tapping public markets for capital and then ignoring short-term earnings is a bit of genius that only a company as promising as Amazon could pull off.
Let’s look at some of the company’s more favorable trends. First, are there many other companies out there approaching $100 billion in annual revenue that are still growing their top lines at 20% per year?
Amazon is also building long-term moats, such as its massive distribution centers, around its various business lines. It has demonstrated success in cutting prices to destroy its competition and then raising them later.
And look beyond earnings to free cash flow… Amazon generated more than $2 billion in free cash flow in 2013 after spending $3.5 billion on capital expenditures.
I would not be concerned about this company’s ability to generate cash (or profits, for that matter) whenever it needs to.
So if you have the patience of private capital to wait for the earnings to come through, by all means, take advantage of the recent sell-off, and take a stake in Amazon.
But for those of you without the inclination or patience to wait for Amazon’s strengths to come through to stellar profit, there is a similar option with more near-term upside potential.
Overstock: A Much Smaller, Nimbler Amazon With Explosive Upside Potential
Overstock (NASDAQ: OSTK) is an online retailer offering discount brand name, non-brand name, and closeout merchandise, such as bed-and-bath goods, home decor, kitchenware, furniture, music, books, watches and jewelry, apparel, electronics and computers, sporting goods, and designer accessories.
In addition, it provides channels for customers to purchase cars, insurance, and travel products and services, and it also sells advertising.
Overstock derives its revenue through two distinct avenues. The majority — 88.8% — comes from fulfillment partner revenue, or merchandise sales that fulfillment partners ship directly to consumers and businesses. This method proves to be essentially riskless, as OSTK is just the intermediary.
Direct revenue, which accounts for the other 11.2%, is derived from merchandise sales that the company owns. The company aims to increase this share because margins are higher.
Overstock’s share price is down 55.9% this year but has “bounced” 8.2% recently on stronger growth.
On a price-to-sales basis, OSTK trades near an all-time low, as well as below the price of competitors. It trades at just 0.260 times its sales compared to its closest competitor Zulily (NASDAQ: ZU), which trades at 3.1 times sales.
In addition, Overstock’s shares trade at a sharp discount to Groupon’s stock, which trades at about 1.6 times sales.
In the second quarter, revenue grew an exceptional 13% year over year, driven by a 9% increase in orders coupled with a 6% increase in order size. Although gross profit margin declined from 19.7% to 18.8%, total gross profit improved 8%, backed by accelerating revenue.
You can’t go wrong with Amazon and Overstock in your saddlebag.
Until next time,
Carl Delfeld for Wealth Daily
