In the not-so-distant past, the shares of online marketplace Etsy (NASDAQ:ETSY) held a prominent position as pandemic favorites within the stock market. However, the gradual return to normalcy in demand and active buyers on its platform effectively wiped out the COVID-induced gains from its stock value.
Presently, Etsy stock finds itself significantly underperforming the S&P 500 Index ($SPX) over the past year and has remained on the sidelines during this year’s resurgence in tech stock values.
As it stands, Etsy shares experienced a decline of around 38% year-to-date, marking a 74% drop from its peak over the past two years. With this substantial decrease in value, the pertinent question emerges: Is Etsy now an attractive investment at its current levels, or is the potential for further decline still looming? Let’s delve into the matter more comprehensively.
To begin, it’s essential to understand Etsy’s business model and revenue generation strategies.
Overview of Etsy’s Operations
Etsy operates as a prominent online marketplace specializing in handmade and artisanal products. The company’s central platform, Etsy.com, serves as a global hub for distinctive and creatively crafted goods, showcasing offerings from independent sellers.
Facilitating connections between buyers and sellers, Etsy generates revenue through various means, including transaction fees, listing fees, and payment processing charges. Additionally, it derives income from optional seller services such as advertising and shipping label provisions. In the year 2022, 74.5% of Etsy’s total revenue was attributed to marketplace activities.
Factors Supporting the Optimistic Outlook for Etsy Stock
Etsy boasts an extensive array of products, including an assortment of handmade, vintage, and custom items from around the world. A notable portion of the company’s gross merchandise sales (GMS) is generated by personalized or made-to-order merchandise.
Etsy’s distinct offerings set it apart from other platforms, providing an opportunity to augment organic traffic, foster brand loyalty, and enhance profitability. Moreover, the company maintains geographical diversity, with approximately 45% of its GMS originating from international markets.
Another positive aspect is the stabilization of Etsy’s GMS per active buyer. The onset of the COVID-19 pandemic led to an increase in GMS and active buyers on the platform. However, as economies reopened and macro uncertainties persisted, there was a moderation in buyer activity, impacting GMS per active buyer.
In a recent conference call, CEO Josh Silverman highlighted the return of many key metrics to positive trends. He noted, “Our negative year-over-year growth rate improved sequentially, and even more important GMS grew year-over-year in May, June, and July as well.”
Additionally, Etsy successfully reengaged nearly 6 million lapsed buyers on its platform during Q2, marking a 21% year-over-year increase. The company’s focus also extends to attracting new buyers.
Etsy’s unique platform offerings, GMS stabilization, and improved performance metrics contribute to its favorable outlook.
Factors Warranting Caution
Despite Etsy’s efforts to enhance metrics such as frequency, average order value, and GMS per active buyer, the broader macroeconomic landscape continues to exert pressure on discretionary consumer spending. This, in turn, could impact GMS and revenue growth rates.
In a Q2 conference call, the company acknowledged the challenging macroeconomic conditions, which may hinder sellers from securing their expected share. Given these circumstances, any substantial improvement in average order value seems unlikely, especially in the near term. Additionally, the potential resumption of student loan payments could introduce further challenges.
The Final Verdict: Buy, Sell, or Hold?
For the Etsy marketplace, the GMS per active buyer on a trailing 12-month basis experienced a 6% year-over-year decline to $128 in Q2. However, this remains significantly above pre-pandemic levels and shows early signs of stabilization.
Etsy’s unique offerings, emphasis on buyer retention, and the potential to reactivate a larger pool of recently lapsed buyers bode well for future growth. Nonetheless, external variables like the aforementioned macroeconomic headwinds and potential changes in consumer discretionary spending due to factors like student loan payments still pose obstacles.
Despite these challenges, analysts covering Etsy stock maintain an optimistic perspective. Among the 24 analysts, 11 advocate a “Strong Buy,” two recommend a “Moderate Buy,” nine hold a “Hold,” one suggests a “Strong Sell,” and one proposes a “Moderate Sell.”
Following the recent price correction, the average price target of $113.96 indicates a projected upside potential of approximately 53% from the current levels.
Featured Image: Freepik @ flaticon
