Etsy, Inc. (ETSY) runs two-sided online marketplaces that bring together millions of passionate and creative buyers and sellers worldwide. The "House of Brands" portfolio of Etsy, Inc. also includes fashion resale marketplace Depop, musical instrument marketplace Reverb, and handmade goods marketplace Elo7 from Brazil.
The company reported impressive second-quarter results, which led its stock to soar 31.7% over the past month. Its platform continues to grow in terms of buyers and sellers. Active buyers increased by 3.8% to 93.9 million, while active sellers increased by 41.5% to 7.4 million in its latest second-quarter results.
While Etsy has maintained its year-over-year growth, it has done so at a higher cost than in previous years. The company's operating expenses for the quarter increased to more than $341 million, or 58.3% of revenue. This is significantly higher than the 55% recorded a year ago. Moreover, the stock is down 37.9% over the past year and 46.6% year-to-date to close its last trading session at $116.9.
Here's what could shape ETSY's performance in the near term:
Inadequate Financials
ETSY's revenue increased 10.6% year-over-year to $585.14 million for the second quarter ended June 30, 2022. Its operating income decreased 18.6% from the year-ago value to $72.56 million. The company’s net income decreased 25.6% from the prior-year quarter to $73.12 million. Its EPS declined 25% year-over-year to $0.51.
Premium Valuation
In terms of forward non-GAAP P/E, the stock is currently trading at 29.03x, 128.9% higher than the industry average of 12.68x. Also, its forward Price/Sales of 5.57x is 485.9% higher than the industry average of 0.95x. Moreover, ETSY's forward Price/Cash Flow of 25.05x is 151.8% higher than the industry average of 9.95x.
Consensus Price Target Indicates Potential Downside
The 12-month median price target of $11.67 indicates a 2.8% potential downside. The price targets range from a low of $83.00 to a high of $168.00.
POWR Ratings Reflect Bleak Outlook
ETSY has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. ETSY has a D for Stability and Value. The stock beta of 1.87 is consistent with the Stability grade. In addition, its higher-than-industry valuation is in sync with the Value grade.
Of the 66 stocks in the F-rated Internet industry, ETSY is ranked #4.
Beyond what I've stated above, you can view ETSY ratings for Growth, Sentiment, Momentum, and Quality here.
Bottom Line
While the company reported solid financial performance in the latest earnings release, analysts expect its EPS to decline 41.9% in the current quarter and 36.9% in the next quarter. In addition, the consensus price target makes its near-term prospects look uncertain. So, we believe it is prudent to avoid the stock now.
How Does Etsy Inc. (ETSY) Stack Up Against its Peers?
While ETSY has an overall D rating, one might want to consider its industry peers, trivago N.V. (TRVG), Expedia Group Inc. (EXPE), and Yelp Inc. (YELP), which have an overall B (Buy).
ETSY shares were trading at $118.88 per share on Thursday morning, up $1.98 (+1.69%). Year-to-date, ETSY has declined -45.70%, versus a -10.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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