Etsy (ETSY 4.76%) posted revenue of $594.5 million and adjusted earnings per share (EPS) of $0.58 in its 2022 third quarter, and both numbers beat what Wall Street analysts were forecasting. What's more, management's guidance for Q4 was well-received, and shares moved higher following the news. Investor optimism surrounding the business has been renewed.
As of this writing, Etsy's stock trades just north of $125. A $200 price target one year from now implies a gain of 60%, which would crush the S&P 500's historical average return of about 10% per year. But is this a realistic scenario? Let's take a closer look.
Here's what needs to happen
Right now, Etsy's stock is selling at a price-to-earnings (P/E) ratio of 36, which is about half its average valuation over the past five years. If we assume that this multiple stays the same 12 months from now, in order for the stock to reach $200, Etsy's EPS needs to rise by 60% in 2023 compared to 2022.
During the five-year period between 2016 and 2021, Etsy's EPS has increased at an average annual rate of 130%, a remarkable feat that demonstrates how well the business has scaled. Therefore, a 60% jump in the upcoming year wouldn't be completely out of the question in the context of those tremendous historical gains.
However, Etsy's growth has slowed dramatically following the pandemic-fueled e-commerce surge in 2020 and 2021. Shoppers flocked to the marketplace for face masks and other specialty items, like bread makers, boosting Etsy's prospects. But now, with in-store shopping popular again and Etsy lapping tough year-ago comparisons, it's not too surprising to see that growth rates are normalizing.
Obviously, a lot also depends on the state of the economy in the near term, which is inherently unpredictable. If inflation remains stubbornly high and the Federal Reserve is forced to continue hiking interest rates well into 2023, then Etsy's performance could suffer. This situation is made worse by the fact that Etsy's marketplaces skew toward discretionary purchases, like home furnishings and jewelry, that consumers can certainly forgo in difficult times.
In fact, the total number of active buyers (94.1 million) and active sellers (7.4 million) on Etsy's various marketplaces, which include Reverb, Depop, and Elo7, actually both declined versus the same period last year. For the business to register monster growth next year, Etsy undoubtedly needs to attract more users to the platform, while at the same time getting buyers to transact more.
Consensus Wall Street analyst estimates predict sales and EPS will rise 9.5% and 0.5%, respectively, in 2023 compared to 2022. If the valuation stays the same, at a P/E of 36, this financial performance, while still respectable, wouldn't help Etsy's stock hit $200.
Keep this in mind
To be clear, I think that Etsy is a great company and looks like a fine investment right now based on its current valuation, excellent profitability, and growth outlook. But it's extremely difficult, if not impossible, to try to predict where a stock is headed in the next 12 months. Anything can happen to the market in the short term.
But luckily, prices tend to march higher over time. Investors should solely focus on trying to identify what they believe are strong businesses trading at attractive valuations. And then plan to hold them for at least five years. This simple strategy is a winning formula for stock market success.
With that said, Etsy is a stock that may or may not reach $200 by the end of 2023. But over the long term, it should be a winner.