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Etsy: A Top E-Commerce Stock for the Current Environment
Stock Analysis & Ideas

Etsy: A Top E-Commerce Stock for the Current Environment

Story Highlights

Etsy’s differentiated presence in the e-commerce industry could be advantageous in the current environment. Despite the underlying challenges, the company’s profitability should remain relatively solid this year. Following a 70% decline from its 52-week highs, Etsy’s investment case appears rather enticing against its industry peers.

After declining about 70% from its 52-week highs, Etsy (ETSY) appears to be a reasonably valued alternative e-commerce play with notable earnings growth prospects. I am bullish on the stock.

The company’s “House of Brands” includes four e-commerce marketplaces. These are the namesake etsy.com, Reverb, Depop, and elo7. Etsy, the company’s most important asset, houses mainly handmade and vintage products, as well as craft supplies.

Reverb is an online marketplace concentrating on musical instruments, enabling musicians to buy or sell equipment. Depop operates as a second-hand clothing marketplace, while elo7 is the “Etsy of Brazil,” giving the company exposure to the Latin American market.

Advantages of an Alternative E-Commerce Play in the Current Environment

What I like about Etsy’s lineup is that its operations are both diversified and focused on particular niches whose performances are not necessarily correlated with the performance of the rest of the e-commerce industry.

For instance, investors are currently worried that the ongoing macroeconomic turmoil will shock consumers’ purchasing power over the next few years. Indeed, inflation spiked 9.1% in June, exceeding expectations and questioning the overall health of the economy. If consumers’ spending is going to decline moving forward, it is likely that Etsy’s marketplaces will benefit.

Specifically, Depop’s sales are likely to grow as some consumers shift from buying new clothes to saving money on second-hand pieces. It’s also reasonable to assume that trading volumes on Reverb will increase as reduced consumer spending means used musical instruments will also become more popular.

The same can be said for Etsy and elo7, as cheaper, handmade products are likely to be preferred over their more expensive, branded counterparts.

Out of that advantage comes another positive factor, which is that the company should remain quite profitable. Note that Etsy has been invariably profitable since Q2 2017, and with its niches likely to gain increased traction in the current environment, this should continue to be the case.

Why is this important? Because the most well-known e-commerce plays that investors usually favor are going to have a hard time this year. Amazon (AMZN), for instance, posted its first unprofitable quarter since Q1 2015 in its most recent results. Sure, the $3.8 billion in losses included a valuation loss of $7.6 billion in Rivian stock, but operating income was also depressed.

The company’s guidance for Q2 pointed toward an operating income (loss) of between $(1.0) billion and $3.0 billion. Accounting for all the other non-operating expenses, this means that the e-commerce behemoth could report unprofitable results for Q2.

Considering the macroeconomic outlook has only worsened since that report, it’s safe to assume the lack of profits will last at least through the end of this year.

Also, take Shopify (SHOP), for example, another e-commerce play. The company’s consensus earnings-per-share estimate for this year has plummeted from $0.67 to $0.09 over the past few months. Thus, the company will barely break even.

My point is, besides the increased likelihood for Etsy to thrive in the current trading environment, investors are looking for high-margin profitable companies that offer an increased margin of safety. Among its industry peers, Etsy appears to have a clear edge in that regard.

Etsy’s Valuation is Reasonable Based on Expected Profits 

One of the criticisms that Etsy would consistently get from prospective investors is its lack of an end-to-end ecosystem. Most importantly, the company does not offer fulfillment services, a major difference from Amazon’s massive fulfillment network. However, this has turned out to be an advantage in the current environment.

Simply put, fulfillment and logistics are currently a nightmare. Supply-chain bottlenecks persist, there is a lack of warehouse space, and truckers demand increasingly higher wages. This is a major reason why Amazon’s profitability has been compressed as well.

Meanwhile, with Etsy’s cash flows in the industry being relatively frictionless, the company has managed to retain rather consistent and juicy margins. Specifically, gross and net margins have unfailingly hovered close to 70% and 20% over the past five years.

Thus, while the market expects most bottom lines in the industry to suffer this year, Etsy’s EPS is expected to decline by just ~15% to $3.65 in Fiscal 2022. This implies a P/E of a bit over 24x at the stock’s current price.

Accompanied with EPS growth expectations averaging around 20% per annum over the next few years, it appears that Etsy shares are rather reasonably valued at current levels.

Wall Street’s Take on ETSY Stock

Turning to Wall Street, Etsy has a Moderate Buy consensus rating based on 12 Buys and six Holds assigned in the past three months. At $113.29, the average ETSY stock price target implies 23.9% upside potential.

Etsy’s Smart Score Rating

Despite Wall Street’s bullish sentiment, Etsy has a Smart Score rating of 5 out of 10, implying that it does not have much potential to outperform the market, going forward.

Conclusion: Etsy Presents a Compelling Investment Case

In my view, Etsy is one of the better picks for investors looking to get exposure in the beaten-down e-commerce space. While the company’s industry peers are likely to experience reduced sales if consumer spending declines, Etsy’s marketplaces could actually attract more online traffic.

Further, due to the company’s margin-rich cash flows, Etsy should remain quite profitable during the ongoing rising-costs environment. Along with shares trading at a rather reasonable multiple against the expected EPS estimates, Etsy’s investment case appears rather compelling.

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