Etsy Inc: Is ETSY Stock Flashing a Buy Signal?

ETSY StockEtsy Inc (NASDAQ:ETSY) had a bull run this year. The company’s stock traded from $6.04 to as much as $16.73 per share over the past 52 weeks. The stock closed at $13.98 per share on Tuesday, August 23.

Etsy stock gained more than 69% in value year-to-date, or more than 89% over the past six months. Some investors are wondering whether the company can sustain its upward momentum over the long term.

Wall Street Gave ETSY Stock a Neutral Rating

Take note that nearly one third of the gains achieved by ETSY stock year-to-date was driven by Citigroup Inc (NYSE:C) when it initiated coverage of the company with a “Buy” rating on August 1, 2016. (Source: “Etsy Shares Surge Double Digits as Citi Says to Buy,” CNBC, August 1, 2016.) The rest of the gains were propelled by Etsy’s strong revenue growth for the second quarter.

Citigroup analysts noted that Etsy has a well established brand for truly unique items, and more than 90% of its traffic is organic. They are bullish on the company’s paid seller services business. The firm’s price target for ETSY stock was $16 per share as of August 3.

A majority of Wall Street analysts reiterated a “Neutral” rating on ETSY stock earlier this month. The analysts had an average price target of $13.82 per share. Morgan Stanley had the lowest price target of $11.50 per share and issued an “Equal Weight” rating on the stock.

ETSY Second-Quarter Results Were Robust

Some investors are betting that Etsy can grow its business continuously based on its strong financial performance in the second quarter.

The company reported that its second-quarter gross merchandise sales (GMS) increased 22.6% to $669.7 million from $546.19 million in the same period last year.

Etsy’s revenue rose 39.1% to $85.35 million from $61.36 million. Its marketplace revenue climbed 22.8% to $37.41 million from $30.47 million, and seller services revenue increased 58.1% to $47.07 million from $29.77 million in the year-ago quarter.

The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) expanded 245.7% to $14.04 million from $4.06 million. Its gross profit grew 42.6% to $56.3 million year-over-year. Its net loss increased 15.1% from $6.35 million to $7.31 million.

According to Etsy Inc, its active sellers increased 11.5% to $1.7 million and active buyers surged 20.3% to 26.1 million during the quarter.

Etsy raised its full-year 2016 guidance based on its solid performance. The company is now expecting to achieve a 13% to 17% GMS growth and 20% to 25% revenue growth. (Source: “Etsy, Inc. Reports 39% Revenue Growth in the Second Quarter 2016,” Etsy Inc, August 2, 2016.)

Etsy Attracts Buyers Because of Unique Inventory

During an earnings call with analysts and investors, Etsy CEO Chad Dickerson stated that the company has built a strong foundation to pursue new opportunities.

He noted that Etsy and its sellers stand apart from their competitors in the e-commerce industry because of their unique inventory. According to Dickerson, buyers go to Etsy to find products that are not available in any other online marketplace.

Dickerson said that the company is focused on making Etsy a daily habit by improving customers’ experiences on its mobile and desktop platforms, and by increasing awareness that it is a go-to shopping destination.

When it comes to the company’s strategy to expand internationally, Dickerson said it is using a machine translation to remove the language barrier between sellers and buyers. Machine-translated listings significantly increase the number of items available to non-English speakers.

Pattern by Etsy Could Drive Company’s Growth

In April, Etsy Inc introduced “Pattern,” a new paid seller service intended to help merchants create their custom web sites easily and promote their products. Pattern is also supported by the company’s “Direct Checkout” and shipping label services. The company is offering Pattern for $15.00 a month. Sellers can try the service for free with a 30-day trial. (Source: “Building Brands for Etsy Sellers, Both On and Off the Etsy Marketplace,” Etsy Blog, April 5, 2016.)

Dickerson noted a healthy conversion rate for Pattern after the 30-day free trial period. According to him, Etsy has released a series of updates to improve the functionalities of Pattern since its launching.

It is worth noting that the company’s seller services achieved a very healthy revenue growth rate in the second quarter. I believe that Pattern could contribute more revenue for the company in the future because sellers who are now using the service are expressing positive feedback.

According to some of the sellers, Pattern enabled them to create their web site without the hassles. They do not have to hire a web designer or learn how to code. Additionally, the service features responsive web pages with co-branded Etsy checkout, reassuring buyers that their transactions are secure.

Word-of-mouth marketing is powerful. Pattern could serve a steady revenue stream if the company could attract its 1.7 million sellers to try the service and continue using it for their businesses.

Assuming that Etsy’s 1.7 million sellers decide to use Pattern, the company could generate $306.0 million in revenue annually or $76.5 million quarterly from the service alone.

The Bottom Line for ETSY Stock

Etsy is operating in a highly competitive industry. All e-commerce companies continue to innovate and implement strategies to attract sellers and shoppers and to maintain their loyalty.

Etsy appears to be a unique marketplace for consumers looking for handmade and vintage products. It is also committed to transparency to ensure the trustworthiness of its platform. As mentioned above, Pattern could be a massive growth driver for the company and ETSY stock could trade higher in the future. However, it still depends on how well the management could encourage its sellers to adopt its new paid service.

It is also noteworthy to mention that Etsy’s largest institutional stockholder is Tiger Global Management, the hedge fund headed by Chase Coleman III, a protégé of legendary investor Julian Robertson. The hedge fund owns 9.81% of the outstanding shares of ETSY stock as of June 29, 2016.