Based in Brooklyn, New York, Etsy, Inc. (ETSY) operates two-sided online marketplaces Etsy.com and Reverb.com that connect buyers and sellers primarily in the United States, the United Kingdom, Germany, Canada, Australia, France, and India. The company’s offering includes handmade and vintage items, art, and supplies, alongside regular clothing, housewares, and more.

ETSY’s business has thrived during the pandemic as stuck-at-home have shoppers turned to online retailers for essential and non-essential items. ETSY’s face mask sales boomed and contributed significantly to its gross merchandise sales. Furthermore, in its most recent quarter, the company topped Wall Street estimates of its top and bottom lines. However, the company delivered lower than expected revenue guidance for the fourth quarter, causing its shares to dip in price. In addition, retailers are still dealing with global supply chain woes. Although chief executive Josh Silverman claimed that the company is immune to the crisis, many of its sellers shared their worries about their businesses struggling to source required materials.

ETSY shares declined 43.8% in price after hitting their 52-week high of $307.75 on Nov.26, 2021. The stock has slumped 24.8% in price over the past month and 11.6% over the past five days to close its last trading session at $163.70. Furthermore, the stock is trading well below its 50-day and 200-day moving averages, indicating a downtrend. And last month, President & CEO Josh Silverman sold 32,500 shares of ETSY at an average price of $238.39 a share, totaling $7.70 million, adding to the bearish sentiments.

Here is what could shape ETSY’s performance in the near term:

Stretched Valuation

ETSY 53.43x forward P/E is 234.2% higher than the 15.99x industry average. In terms of forward EV/Sales, ETSY is currently trading at 9.69x, which is 612.9% higher than the 1.36x industry average. Also, its 9.04x forward Price/Sales is 667.4% higher than the 1.18x industry average.

Weak Bottom Line

ETSY’s revenues increased 17.9% year-over-year to $532.43 million in its fiscal third quarter, ended September 30, surpassing the consensus estimate by $13.29 million. However, its net income came in at $89.93 million, down 2% from the same period last year. The decline can be attributed to acquisition-related expenses and non-cash amortization for the acquisitions of Depop and Elo7. Its adjusted EBITDA margin declined 100 basis points from the same period prior year to 33%, and its EPS came in at $0.62, indicating an 11.4% decline from its prior-year quarter. However, it topped Street estimates by 14.8%. In addition, the company’s net cash provided by operating activities decreased 17% year-over-year to $361.09 million in the nine months ended September 30, while its cash and cash equivalents balance stood at $624.74 million, compared to its $1.15 billion year-ago value.

Bottom Line Expected to Worsen

Analysts expect a 10,8% year-over-year increase in the company’s revenue in the about to be reported quarter, ended December 31, 2021, 19.6% in the current quarter, and 33.1% in fiscal 2021. However, its EPS is expected to decline 29.6% in its last quarter and 16% in the current quarter. The Street expects a 13.8% year-over-year improvement in its EPS in fiscal 2021.

POWR Ratings Reflect This Bleak Prospects

ETSY has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Stability, which is consistent with its 1.55 beta.

ETSY has an F grade for Value. Its stretched valuations justify this grade.

Of the 77 stocks in the F-rated Internet industry, ETSY is ranked #54.

Beyond what I have stated above, one can also view ETSY’s grades for Sentiment, Growth, Momentum, and Quality here.

View the top-rated stocks in the Internet industry here.

Bottom Line

ETSY has been one of the biggest beneficiaries of the pandemic-driven e-commerce wave. However, in its most recent quarter, the company had reported weak bottom-line growth. The company expects fourth-quarter revenue growth of about $660 million - $690 million, representing a 10% year-over-year growth at the midpoint, which is lower than Street’s expectation of 10.8% growth. Moreover, ETSY’s lofty valuation and high volatility could be a concern. Thus, we think it could be best to avoid the stock now.

How Does Etsy, Inc. (ETSY) Stack Up Against its Peers?

While ETSY has an overall POWR Rating of D, one might want to consider investing in Travelzoo (TZOO), which has an A (Strong Buy) rating, and Yelp Inc. (YELP) and Alphabet Inc. (GOOGL), which have a B(Buy) rating.

Click here to check out our E-commerce Industry Report

ETSY shares fell $3.70 (-2.26%) in premarket trading Tuesday. Year-to-date, ETSY has declined -25.23%, versus a -2.16% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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