Why Etsy Stock Trades at a Discount
Remember when investors put Etsy Inc (NASDAQ:ETSY) in a proverbial coffin? Most of them were already bearish on ETSY stock, having crushed the price soon after the stock’s initial public offering (IPO).
They thought there was no way the company could sustain growth. Investors ran scared the moment Amazon.com, Inc., the big kid on the block, had set its eyes on Etsy’s business. (Source: “Amazon Targets Etsy With ‘Handmade’ Marketplace,” The Wall Street Journal, May 22, 2015.)
Etsy is a web site that connects artisans and shoppers. You can find all sorts of handcrafted jewelry and accessories on its site, from a Victorian-style necklace to a custom purse. Additionally, the site allows for vintage and antique e-shops and craft materials suppliers. If you think that’s a small business, then think again.
This industry stretches well into the billions and Etsy is the clear market leader. The company went public less than a year ago, but its shares didn’t get off to a great start. Investors were skeptical of further growth. That skepticism soon morphed into cynicism when rumors leaked that Amazon would seek to enter this retail niche.
I don’t really blame analysts and investors for panicking. They’ve seen this game before. Amazon decides to enter a new business, then it crushes all the incumbents with its rock-bottom prices. The company is a growth machine that doesn’t care about making profits, which is a tough combination to beat.
But there was something that both analysts and investors had forgotten to account for. That little slip-up could be ETSY stock investors’ ticket to huge gains. Some investors could use Etsy stock as their vehicle to riches, but I doubt this opportunity will last very long.
Etsy Stock Jumps 16% After Earnings
I understand investors getting skittish, but analysts hopped on the bandwagon, too. They really believed Amazon’s new “handmade” section would crush Etsy. From the moment the Amazon rumors started circulating, ETSY stock lost about 65% of its value.
It looked like yet another piece of collateral damage in Amazon’s quest for business dominance. But then something incredible happened (or didn’t happen, depending on how you look at it). Etsy kept growing. Amazon had absolutely no impact.
The company’s revenue increased 40% between 2014 and 2015, from $195.6 million to $273.5 million. Etsy also saw a boost in engagement. There were 15.5% more active sellers and 21.4% more active buyers. (Source: “Etsy, Inc. Reports Fourth Quarter and Full Year 2015 Financial Results,” Etsy Investor Relations, February 23, 2016.)
It’s hard to argue with facts. Etsy has proven its niche brand appeal is harder to replicate than markets believed. Amazon couldn’t simply swoop in and undercut Etsy on price because customers were paying for authenticity.
The company gave strong guidance for 2016, 2017, and 2018. It thinks annual revenue growth could stay above 20% for that time period: “We have no reason to believe any competitors are having an impact on our seller business right now,” added Etsy CEO Chad Dickerson. (Source: Ibid.)
Considering that ETSY stock fell from $21.00 per share to $7.40 on these fears, it’s not unreasonable to expect a full-blown surge. The stock already climbed 16% after earnings came out, although it pared back some of those gains.
The market is in a precarious state right now, but as investor sentiment improves, these developments could start to get priced in. I wouldn’t be surprised if Etsy stock tripled in value by the end of the year, since even a 300% gain would leave the share price way below its $30.00 initial public offering price.