What happened
Shares of online marketplace Etsy (ETSY +0.00%) tanked on Thursday after the company reported financial results for the first quarter of 2021. Q1 results showed blistering growth, but management's guidance for the second quarter suggested things are cooling off. For this, the stock was down a painful 13% as of 10 a.m. EDT. And the stock is now down 35% from an all-time high reached earlier this year.
So what
Q1 sales on Etsy's platform (known as gross merchandise sales, or GMS) were up an outstanding 132% from the first quarter of 2020. Of course, Etsy doesn't sell products directly. Rather, independent merchants use the platform to sell their handcrafted products and Etsy takes a cut -- the cut contributes to the company's revenue. Revenue for Etsy was up 142% year over year and, because it gains operating leverage with scale, net income was up an eye-popping 1,048% to $144 million.
Image source: Getty Images.
If the stock market looked backwards, Etsy stock would be up big with numbers like this. However, the market is forward-looking, and the company's guidance disappointed. For Q2, management expects GMS to grow only 5% to 15% from the comparable period last year -- a sharp drop-off from its growth rate in Q1.
With this news, a slew of analysts were quick to cut their price targets on Etsy stock. For example, according to The Fly, an analyst with Oppenheimer slashed the price target from $240 per share to $200 per share -- a whopping 20% decrease.
Now what
While the market is forward-looking, I would argue that many investors and analysts don't look far enough forward. Indeed, growth stocks like Etsy have been selling off sharply over the past couple of months, stoking fears and leading to reactive moves. For example, Oppenheimer is lowering its price target for Etsy today by 20%. But let's not forget that the $240 price target was set by the same Oppenheimer analyst on Feb. 26. In February the market was hot and investors were more optimistic, leading to higher price targets. So take today's lowered price target from Oppenheimer and others with a grain of salt.
For Etsy shareholders, there's an overlooked metric that I believe bodes well to the long-term health of the company. In Q1, active buyers on the platform were up 90% year over year and active sellers were up 67%. The continued steady increase of both buyers and sellers creates a kind of network effect, making this a stronger platform and harder to disrupt. This doesn't mean the stock can't head lower in the short term -- it can. But for those with a three- to five-year time horizon, Etsy's business is looking strong.
