Why Etsy Should Deliver Something Special For Investors

Why Etsy Should Deliver Something Special For Investors
Andrew Rummer

over 2 years ago3 mins

Summary:

  • Etsy got a handy boost from lockdown sales of bespoke face masks. But now that boom is fading, the underlying business still looks in good shape.
  • The company is generating cash and expanding into new markets like India.

What’s the pitch?

Long on Etsy (ticker: ETSY).

What does it do?

Etsy is a US ecommerce company focused on hand made or vintage items and craft supplies. It has carved a niche in the market and connects artists and independent traders to consumers who are looking for that personal touch to their personal or gift purchase. Etsy has been riding a pandemic-driven boom (facemask sales) which seems to be losing fuel. However its long-term growth remains intact. 

What’s your investment thesis?

  • In the second quarter of 2021, Etsy generated revenue of $529 million, up 23% from the prior year. While this was a significant slowdown compared to the previous four quarters – when Etsy delivered sales growth greater than 125% – active sellers (up 67%) and active buyers (up 50%) still increased at an impressive rate.
  • Excluding face mask sales to make the numbers more comparable, gross merchandise sales rose 31%. This shows continued appetite in the marketplace for personalized or artisan products.
  • It’s unrealistic to expect the blockbuster growth Etsy has shown in the last year or two to continue, but its long-term potential is still sound. It has opportunities to expand in large markets like India and its acquisition of Depop can help incubate smaller fashion brands. Combine this with enviable cash flow and margins greater than 70% and you have a very solid business to invest in.

What are the key events you’re watching?

  • Third-quarter guidance has been weak so I would expect the market to react to catalysts such as inflation data.
  • I would be waiting for these selloffs if you don't yet have a position in Etsy, which – at a price-to-earnings (P/E) ratio of nearly 60 – is a bit pricey. I would hold and build a position closer to $140-$150 but the popularity of this stock might mean a strong trigger would be required to create this sale.
  • Certainly third-quarter earnings will be key to watch, with the holiday season to follow.

What’s the upside potential if your thesis is correct?

Following this short-term volatility, I expect Etsy will deliver a solid 14% annual return. Cash is always king in a business and Etsy’s cash flow is strong. 

What are the big risk factors you’ve spotted, and how do you plan to mitigate them?

The biggest risk is the high valuation as of today. While the stock is really popular and there is a short-term recovery of the stock post earnings announcement sell-off, I see a short-term downside which I am waiting for to add to my position. I also see bad execution and lack of adaptation in markets such as India a risk. I will be looking out for its performance there for my long-term strategy.

This insight was submitted by a community member for information and educational purposes. It doesn't represent the views of the Finimize team and shouldn't be taken as financial advice.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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