What a brutal six months it’s been for Etsy. The stock has dropped 35.9% and now trades at $47.63, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Etsy, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Etsy Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid ETSY and a stock we'd rather own.
1. Declining Active Buyers Reflect Product Weakness
As an online marketplace, Etsy generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.
Etsy struggled with new customer acquisition over the last two years as its active buyers have declined by 1.4% annually to 93.54 million in the latest quarter. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If Etsy wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Etsy’s revenue to drop by 5.2%. This projection doesn't excite us and suggests its products and services will face some demand challenges.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Etsy’s EPS grew at a weak 1.4% compounded annual growth rate over the last three years, lower than its 4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Etsy isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 9.4× forward EV/EBITDA (or $47.63 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Etsy
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