Etsy's Stock Fell 25% Due To Slowing Consumer Spending

According to Jefferies, Etsy is in peril as consumers cut back on their purchases.

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According to analyst John Colantuoni, the company is forced to spend more on advertising as the rate of customer turnover rises, and the stock has been doubly lowered from buy to underperform. According to the analyst, this is placing pressure on Etsy's EBITDA.

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Colantuoni told clients on Thursday that "we see upside to consensus from slower top line and moderate margin expansion," given the more constrained take rate upside and deteriorating buyer trends.

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Colantuoni stated, "We are double-downgrading to Underperform (from Buy) as ETSY's 70% valuation premium to Internet is unsustainable considering below average EBITDA growth (11% vs. 15%) and risk of downside to consensus.

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The analyst observed that during 2022, Etsy's buyer turnover increased, reaching an all-time high in the fourth quarter. According to the report, consumer spending decreased at this period as well, falling 3% year over year in the fourth quarter. To attract new customers, marketing expenditures increased by roughly 70% in the fourth quarter.

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We are concerned that relying too heavily on new customers can increase churn (and marketing) and put pressure on spending by lowering the proportion of current customers who are more loyal and frequent. Colantuoni stated, "Slowing GMS growth and little margin upside resulted in negative to consensus.

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Etsy saw significant growth for several years after its initial offering to the public in 2015. However, the online retailer as well as other internet stocks were negatively impacted by rising interest rates throughout the previous year. Following a more than 45% decline in 2022, Etsy shares are down 5% in 2023.

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Colantuoni, more bad news is coming. Etsy shares might drop another 25% from Wednesday's closing, according to the analyst's new $85 price target, down from $150. In premarket trade on Thursday, the stock fell 6%.