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Etsy Bulls Predict an End to Stock's Miserable Run

September 21, 2023
minute read

Wall Street is displaying optimism regarding a potential turnaround for one of the weakest performers on the S&P 500 Index, Etsy Inc., an online marketplace. Despite being the second-weakest performer on the index since the close of 2021, Etsy is now witnessing a record number of analyst buy ratings. The average price target for the stock suggests a potential gain of nearly 70% from its current levels. This shift in sentiment comes after Etsy's stock lost over two-thirds of its value in the past 21 months.

David Klink, Senior Analyst of Equity Research at Huntington Private Bank, views Etsy as an attractive entry point for investors. He suggests that diversification in portfolios and investing in underperforming stocks could be the next growth driver.

Wolfe Research recently upgraded Etsy's rating to the buy-equivalent of "outperform," highlighting several avenues for the company to enhance profitability in the coming years, including increased consumer spending and cost-cutting measures.

Deepak Mathivanan, an analyst, noted that Etsy shares have the potential to outperform in various scenarios. However, it's important to acknowledge that investors who placed bets on Etsy over the past two years experienced disappointment. Despite experiencing robust sales growth during the COVID-19 pandemic, driven by increased demand for homemade face masks and decor, Etsy's revenue growth has since slowed significantly. The stock, which reached nearly $300 in late 2021, is now heading for its second consecutive annual decline of over 45%.

In contrast, other e-commerce stocks have performed well. An exchange-traded fund tracking online retailers has seen strong gains this year, primarily due to significant advances by companies like Amazon.com Inc., Wayfair Inc., and Shopify Inc., all of which have risen by more than 60%.

This disparity might be attributed to the prevailing "bigger-is-better" sentiment this year, driven by rising interest rates and economic uncertainty. Unlike Amazon, which enjoys a dominant market position and a strong balance sheet, companies like Etsy may be considered more niche and discretionary in nature.

However, one aspect that appeals to Etsy enthusiasts is its valuation. The stock currently trades at 16 times earnings projected over the next 12 months, a significant discount compared to its five-year average of 46 times and below the valuations of its e-commerce peers.

Nevertheless, Etsy's revenue growth has slowed considerably, with sales projected to expand by only 7% in 2023, compared to an average growth rate of 46% over the past five years.

Even bullish analysts express uncertainty about the timing of Etsy's turnaround. Evercore ISI analyst Shweta Khajuria, who has an "outperform" rating on the stock, believes that while there is upside potential in the mid-to-long term, Etsy's shares might remain range-bound in the near term due to macro-economic challenges, competition, and higher marketing costs.

Despite the challenges, David Klink of Huntington Private Bank finds Etsy's depressed valuation compelling, believing that the stock may benefit from overly pessimistic assumptions about U.S. consumer purchasing power. In his view, this presents an opportunity worth considering.

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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