Etsy (NASDAQ:ETSY) was among the swath of e-commerce stocks that benefited immensely from the pandemic. Its revenue growth from Q1 2020 to Q1 2021 was in the triple-digit percentage range. However, since then, its growth has dipped significantly, and poor capital investment decisions by its management have only compounded its troubles. Meanwhile, its stock still trades at a lofty valuation, hardly reflecting the slowdown in its operating performance and poor outlook ahead. Hence, we are bearish on ETSY stock.
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During the pandemic, growth stocks like Etsy witnessed massive growth in revenues pushing its stock price to new heights. The stock surged over 300% in 2020 and more than 20% in 2021. However, last year, the stock market oblivion reversed many of its gains, resulting in a 45% drop.
Moreover, the firm’s forward growth estimates pale compared to its five-year revenue compound annual growth rate (CAGR) of roughly 48%. Meanwhile, its year-over-year EBITDA growth is firmly in the negative, sitting at -17.4%. Also, net income in its third quarter came in at a negative $963 million.
Despite the weaknesses in its underlying business, its stock still trades at an unreasonable valuation. ETSY stock is currently trading at over 36 times forward cash flow estimates, about 200% higher than the sector median. Additionally, it trades at 7 times forward sales estimates, an alarming 618% higher than the sector median. Hence, it’s not the stock you’d want to wager on, especially in the current economic climate.
Etsy’s Growth is Slowing Down
Many investors would be of the opinion that Etsy was primarily a pandemic bet and that the future is likely to be murky for the firm. Based on analyst estimates, it’s safe to say that the days of stunning growth are a thing of the past. Compounding its problems is the slowdown in e-commerce as a share of U.S. retail sales. It reached an incredible 15.7% during the second quarter of 2020 but dropped to 14.8% in the third quarter of last year.
The pattern is reflected in the platform’s user base. Etsy’s third-quarter results showed a 0.9% and 1.9% drop in active sellers and buyers, respectively, from the prior-year period. Naturally, investors will have been quick to point out the effects of the post-pandemic future on the platform. However, we still feel there is a case to be made about the sustainability of the platform’s growth over the long term, albeit at a slower pace than in the recent past.
Nevertheless, Etsy’s management has been shy about investing in the company’s future. It added two additional marketplaces to the platform, Depop, and Elo7, for a total of $1.8 billion in 2021. However, in its most recent quarter, the firm had to write down these purchases resulting in a massive $1 billion impairment expense. Many had criticized Etsy’s management of overpaying for the marketplaces, and its whopping impairment charge solidifies the notion.
The bottom line is that growth rates are slowing down and were noticeably down last year. Its management believed that operating results during the fourth quarter would improve. However, Etsy’s lackluster sales guidance for the quarter of only $700 million to $780 million negates that viewpoint. Putting things into perspective, the guidance suggests that revenue may possibly be lower than the $717 million recorded in the fourth quarter of 2021.
Is ETSY Stock a Buy, According to Analysts?
Turning to Wall Street, ETSY stock maintains a Moderate Buy consensus rating. Out of 17 total analyst ratings, 11 Buys, six Holds, and zero Sell ratings were assigned over three months. Nonetheless, the average ETSY stock price target is $132.2, implying 8.3% downside potential. Analyst price targets range from a low of $75 per share to a high of $175 per share.
The Takeaway
Despite the impressive profitability that Etsy has shown in recent years, investors need to be cautious when looking into its future. The number of users on its platform has plateaued, putting it at risk for a potential dip in performance during tough economic times.
Unfortunately, Etsy’s current stock price is overstating the business’s potential, and investors should anticipate future growth rates that are significantly lower than they may have come to expect. It’s unlikely that its headwinds will disappear soon, pointing to a tough road ahead for ETSY stock and another weak quarterly showing later this month.
