Bullish quarter out of Long Idea OSTK. It was a headline beat, though the absolute results didn’t look great with revenues down 20% and customers down 29% with 312bps of operating margin compression. All of those declines however, were improvements vs the 1Q results. On the near term outlook, management noted that July is slightly better, quarter to date down high teens vs -20% in 2Q. Revenue growth is likely to accelerate around the launch of the US Bed, Bath, and Beyond site in early August, even in the face of headwinds to online home spend like declining home turnover and student loan payments returning. The OSTK management team was very transparent about the state of the industry, saying “I think that reading the papers, there's talk about the US economy avoided a recession. I would say the home furniture and furnishings industry has had a recession. Our industry has been in recession and still – there's still some glut of inventory out there. There's still liquidation going on. I can't predict how quickly we're going to get out of this if we get back to normal.” That comment supports our view, that near term (next 2 to 3 quarters) there is going to be demand and margin risk, with spending headwinds and inventory liquidations, but longer term there is a likely recovery in unit consumption, particularly in the online channel.
On the US Bed Bath launch, the company has added 600k SKUs leveraging the brand name within the existing and new vendor base. The company is also tempering margin expectations as it plans to invest in marketing and discounting (bearish W/ETSY), to drive new customer acquisition as it leverages the unique opportunity around new IP, and the large BBBY customer list. The company isn’t guiding to specific revenue targets, because there is a wide range of outcomes for the Bed Bath launch. With Bed Bath having been around $800mm in ecommerce sales, we think OSTK can add $200 to $300mm in incremental sales, while also growing the core.
We can’t forget the tZERO/Medici Ventures opportunity. We think the optionality around the company’s stake in tZERO presents the potential for significant upside depending where the tokenized securities market goes long term. The SEC is cracking down on digital assets that reflect securities currently being traded on unlicensed exchanges. This is applying a lot of pressure on tZEROs perceived competitors who have essentially been declared to have been breaking the law in the US. tZERO is one of the few security token platforms that has gone by the book in building with full SEC approval. The share opportunity is clearly growing for the company, the question now is how big will this industry be post the ‘crypto winter’ and when will it really ramp to large scale. Remember that ICE (owner of NYSE) is now a big investor in tZERO and the new CEO comes from ICE.
With a successful US Bed Bath launch we think the ecommerce business is worth $40 to $50 within 12 months (1.2x EV/Sales, TAIL EBITDA Opp of $120 to $150mm). tZERO on a bear/base case adds $1 to $6 in value. Then you have about $7/sh in cash. We think it’s fair to say in 6 to 12 months this stock is worth $50 to $60 or 40% to 65% upside. On a TAIL bull case with both OSTK ecommerce and tZERO being successful, you could see this stock being worth $100+. We like the long pair here with Best Idea Short W. We’re moving this higher on our Long Bias list with the potential catalysts for it to become a Best Idea being a more bullish online home retail outlook, and/or a market environment more conducive to small cap growth consumer discretionary (ie not Quad4).
