Long Overstock, Short Wayfair? A Potential E-Commerce Pair Trade Ahead Of Earnings

Online home furnishings retailers Overstock.com Inc OSTK and Wayfair Inc W will be reporting third-quarter earnings in the coming weeks, and one analyst said Thursday that he prefers one stock over the other ahead of the upcoming reports.

The Analyst: Bank of America analyst Curtis Nagle reiterated a Buy rating on Overstock.com and raised his price target from $89 to $97. Nagle also reiterated a Neutral rating on Wayfair and cut the price target from $302 to $275.

Related Link: Netflix Analysts Break Down Q3 Earnings: 'Solid Recovery With Large Content Launches Ahead'

The Thesis: In his note, Nagel said Overstock has generated improving web traffic levels early in the fourth quarter compared to Wayfair.

Year-to-date through the end of the third quarter, Nagle said web traffic for both Overstock and Wayfair is down between 20% and 30% thanks in large part to extremely difficult pandemic comps.

On a two-year basis, Overstock’s web traffic is outgrowing Wayfair’s, and Nagle said that performance gap widened in October.

“We believe this gap will likely hold if not get better for OSTK as it continues to refine its marketing, pricing and product assortment,” he said.

The good news for both Overstock and Wayfair investors is that Nagle predicted traffic for both platforms could improve in coming months as inventory shortages subside.

He said one of the bullish long-term differentiators for both platforms is that their large number of vendors provide more product flexibility and variety.

Nagle is projecting $27 million in third-quarter EBITDA for Overstock, slightly short of consensus Wall Street estimates of $28 million. For Wayfair, Nagle is forecasting $106 million in EBITDA, ahead of consensus estimates of $86 million.

Benzinga’s Take: Nagle’s Neutral rating for Wayfair suggests he isn’t particularly bearish on the stock, and his lower price target still represents more than 12% upside from current levels. But traders looking to mitigate risk from the upcoming earnings reports can still make a pair trade to bet on relative performance by going long Overstock and short Wayfair.