April changed the conversation around Etsy (NASDAQ:ETSY), the third-party e-commerce site that had largely trended down throughout 2019 as analysts questioned whether it could find any growth catalysts. The moment came when the federal government reversed course and said people should, in fact, wear face masks when out in public to help slow the spread of COVID-19. 

Dr. Anthony Fauci, the infectious disease specialist who serves as President Trump's point man on the coronavirus pandemic, recently confirmed that the government did not initially recommend mask-wearing for the general public due to shortages of masks at the time. He wanted to ensure frontline healthcare workers had sufficient supply available.

The effect for Etsy was almost immediate, as CEO Josh Silverman told Fortune -- traffic to the site spiked with people specifically searching for "face mask." At one point, searches for the term at one point hit nine per second.

Woman making crafts with feathers

Image source: Getty Images.

Jumping on the bandwagon

When Etsy reported earnings last month, it said that 12 million fabric face masks worth $133 million were sold in April alone. Silverman said that "it was like waking up and discovering that it was Cyber Monday, except that everyone in the world wanted just one product."

Now analysts can't get enough of Etsy, with one analyst from Goldman Sachs pushing his price target on the stock to a high of $120 per share, up from $88 per share beforehand, and almost 20% higher than where the stock trades today.

Etsy stock has tripled from its March lows, but that hasn't kept other analysts from weighing in as well, setting nearly-as-ambitious targets for Etsy's stock. But can the e-commerce site maintain this kind of torrid growth?

The rising tide

On the one hand, Etsy may have found its catalyst -- not in face masks, but rather with consumers having discovered the Etsy site and having been introduced to the variety of goods available for purchase. They may return to shop even after the crisis passes.

Etsy's quarterly earnings report revealed that not only did face mask sales soar, but non-face mask sales rocketed 79% higher in April compared to a year ago. The site saw sales of home goods, craft supplies, self-care, toys, and games all rise sharply.

Silverman believes Etsy's ability to pivot to become a primary outlet for consumers in need shows how it can fill voids in the retail market. With bankruptcies mounting and large-brand bankruptcies hitting their highest level since the 2009 financial markets crisis, the void may very well expand.

High expectations

On the other hand, it's clear this is a unique circumstance. While new customers may have stumbled onto Etsy as a result of looking for face masks, keeping them coming back may not be so easy.

They still have numerous options on where to shop, and it's not certain that the market for discretionary, artisan-made goods that was in question last year is now suddenly more relevant. Nor does it seem that the lofty valuations Wall Street is assigning Etsy can be sustained.

Shares trade at 174 times trailing earnings and 80 times next year's estimates, and the enhanced price targets analysts have assigned the stock inflate those valuations even further, putting Etsy well beyond the valuations of similarly situated, but arguably better positioned e-commerce businesses, including Amazon.com, Alibaba, eBay, and JD.com.

Etsy's dark side

Worse, sellers on the site have been disenchanted with changes Silverman has made to the platform, including:

  • Increasing the fees Etsy charged to sellers from 3.5% to 5%
  • Taking a cut from shipping fees sellers charge
  • Requiring sellers to use its own payment system, not PayPal, thus giving it another cut of the sale
  • Telling sellers they had to offer free shipping on orders over $35 or they would be deranked in its search algorithm
  • Automatically advertising sellers, but charging them for it if it led to a sale, ranging between 12% and 15% of the sale price depending upon the seller's size (smaller sellers pay more, but can opt out; large sellers can't)

So while there is a good chance Etsy will see a boost to revenue this quarter, and maybe even one or two afterwards, it doesn't justify Wall Street exuberance.

Etsy is not the growth stock analysts are painting it as, and because there are still undercurrents of dissent flowing beneath the surface, it may not be able to mask its weaknesses much longer.