Over the past two months, Etsy (ETSY -0.22%) shares have shed a jaw-dropping 50% of their value. The market is souring on high-growth names as looming interest rate hikes pressure what appear to be expensive stocks.
This pandemic winner has definitely seen better days, and maybe this year is when the recent pessimism reverses. Could Etsy stock reach $300 in 2022? Let's dive in and try to find the answer.
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What needs to happen this year?
Based on Etsy's current stock price of about $150, its shares would have to appreciate 100% over the next 11 months in order to hit $300 this year. While this seems like a monumental challenge, the online marketplace's stock has returned greater than 1,100% over the past five years, so a huge run-up in 2022 isn't outside the realm of possibility.
Recognizing that we can't predict what the market sentiment will be ahead, let's assume that Etsy's current price-to-earnings ratio of 45 remains unchanged at the end of the year. This means its net income would need to soar 100% from 2021 to 2022 for the stock to reach $300. The company's profit did skyrocket from $96 million in 2019 to $349 million in 2020, but that monster jump was because of the pandemic. As brick-and-mortar retailers shut down, consumers turned to e-commerce platforms like Etsy for their shopping needs. Booming demand for face masks also bolstered the company's growth.
With an economy that is gradually reopening, it's not prudent to believe a similar kind of performance is in the cards. Wall Street appears to feel that way. Analysts are expecting Etsy to produce earnings per share of $3.43 in 2022 after generating $3.03 this past year. That implies only a 13.2% year-over-year increase, which is likely not enough to propel the stock to $300.
A $300 share price isn't likely in 2022
Etsy did experience annual growth far in excess of 100% in each period from Q2 2020 through Q1 2021 during the depths of the COVID-19 crisis; however, we are now seeing a normalization of consumer behavior, particularly as it relates to companies that received a pandemic surge. Netflix and Peloton, for example, are also going through post-pandemic slumps as demand weakens.
On the revenue front, Etsy's management team predicts a 33% year-over-year increase in 2021, which is likely in the neighborhood of the growth rate investors should expect in the years ahead. A continuation of this type of sales expansion in 2022 also won't be enough to push the stock to $300 so quickly.
Unless there is significant multiple expansion between now and the end of the year, I don't expect an investment in Etsy today to return 100% in 2022. The Fed's comments about raising interest rates this year certainly spooked investors in high-growth names, but once the central bank actually implements this strategy, I think valuations could be under even more pressure.
While it may not happen this year, I believe Etsy's share price will eventually eclipse $300. The business benefits from network effects, has a strong brand, possesses superb financials, and still has a long growth runway ahead. As a result, I think for long-term investors it can still make for a fine investment candidate right now.
