Why Etsy Stock Struggled Thursday Morning

What happened

Shares of Etsy (ETSY -0.48%) slumped Thursday morning, tumbling as much as 6.9%. As of 2:48 p.m. ET, the stock was down 6.7%.

The catalyst that sent the e-commerce platform lower was a tepid take by a Wall Street analyst.

So what

Bank of America analyst Curtis Nagle initiated coverage of Etsy stock with a neutral (hold) rating, while issuing a price target of $120. That represents potential gains for investors of roughly 15% over the coming year compared to Wednesday's closing price. 

The analyst thinks Etsy will return to high-single-digit revenue growth late in 2023, but cited the difficult macroeconomic situation and tough comps as headwinds in the near term. As such, he remains cautious about the prospect that Etsy will be able to reaccelerate its growth anytime soon. He views the handmade and vintage goods sold on Etsy's platform as discretionary, at a time when consumers are faced with decades-high inflation and difficult purchase decisions.

Now what

Etsy's second-quarter results left little question that while the company had made progress, challenges remained. Revenue climbed 11% year over year, while higher operating expenses pressured profits, as earnings per share declined 25%. More troubling, though, was the company's gross merchandise sales -- or the value of the products sold on its platform -- which actually fell. Furthermore, backing out its recent acquisition, Etsy's active buyers declined as well, as did repeat buyers. 

The rising revenue and falling merchandise sales painted a conflicting picture, which is easily explained by the increase in Etsy's seller transaction fee, which jumped from 5% to 6.5% earlier this year. If not for the higher fees, revenue would have been down as well.

Add to that already troubling trend rising inflation and higher interest rates, and it's easy to see the challenges Etsy faces in the months ahead. It remains to be seen if the company can reignite the fire that drove its sales during the pandemic, but until then, Etsy investors should keep a weather eye on the horizon.