Etsy stock price analysis: in trouble, but a rebound is possible

Etsy (ETSY) stock has moved from a beloved Wall Street darling into an embattled fallen angel as its business has slowed significantly. It has dropped to $52.80, its lowest point since April 2020, and 82% below its highest level during the pandemic. $10,000 invested in the company at its peak of $307 in 2021 would now be worth just $1,690.

How Etsy became a fallen angel

Etsy was one of the most popular companies during the Covid-19 pandemic. It attracted more sellers amid the lockdowns, which increased its seller fees. At the same time, the low interest rate environment, coupled with government stimulus and high savings, led to more spending.

As a result, its annual revenue rose from $818 million in 2019 to over $1.7 billion in 2020 and $2.74 billion in 2023.

The past few years have been difficult for Etsy as the number of creators in the network has dropped. Also, higher interest rates have made many people to reduce their discretionary spending, which has led to a slow revenue and profitability growth.

At the same time, Etsy’s relationship with its sellers is challenging because of the increase in its fees. In 2022, some of its biggest sellers went on strike after the company increased its transaction fees to 6.5%. Many sellers have quit because of the meager revenue they make.

Etsy’s active sellers rose by 5.9% to 8.8 million in the second quarter, while buyers rose by just 0.4% to 96 million. That is a sign that demand for crafts made in its platform has slowed.

Etsy’s growth metrics have slowed

The most recent quarterly results showed that Etsy’s business continued slowing down this year. Its gross merchandise sold dropped by 2.1% to $2.9 billion in the second quarter and by 2.9% in the year’s first half.

Etsy’s quarterly revenue also dropped from $628 million in 2023 to over $647 million. Its marketplace revenue, which takes a cut for all transactions, rose to $470 million while the service figure jumped to $177 million.

Most importantly, Etsy’s profitability has dived even after the management slashed 11% of its workforce. Its net income dropped by 14.4% to $53 million.

These numbers mean that only a handful of Etsy sellers are making good money. The average revenue per seller in the last quarter was about $75.

Etsy’s forward guidance was also weaker than expected, with its GMV falling by a low single digit.

Etsy earnings ahead

The next important catalyst for Etsy’s share price will be its earnings, which will be released on October 30th. These results will provide more information about Etsy’s business and whether management’s turnaround efforts are working.

According to Yahoo Finance, analysts expect Etsy’s revenue to reach $653 million, an increase from last year’s $640 million.

Its third-quarter revenue guidance will be $867 million, while its annual figure will be 2.40 billion.

However, these estimates should be taken with a grain of salt since the company has missed its earnings forecasts in the last three consecutive quarters, meaning that the trend may continue in the near term.

More metrics show that the company is not doing well. For example, SimilarWeb data shows that its website traffic rose slightly to over 423 million in August.

Etsy’s valuation metrics

The ongoing Etsy stock plunge has led to a valuation reset, with its price-to-earnings ratio at 12.48. The sector’s P/E multiple is 15.13, while its five-year average is 38.

Etsy’s forward P/E ratio of 11.68 is also lower than its sector median of 17 and its five-year average of 40. This valuation reset is because Etsy is not the company it was a few years ago when it used to have double-digit growth rates.

Etsy’s net profit in 2023 was over $307 million, while its market cap is over $6 billion. This means that its valuation is significantly stretched, considering that it also has a big debt load of over $2.28 billion.

Also, I believe that Etsy’s business will not benefit from low interest rates, as some analysts expect.