Shares of Etsy (ETSY 0.34%) fell 14% following the release of its latest earnings report. And the stock has continued to fall since then. This is even as the company has continued to grow, with its active buyer count climbing by 3% to more than 96 million. Why are investors so down on Etsy's stock, and does its lower valuation make it an attractive time to invest in the online marketplace?
Earnings grew in Q2 but profits fell
Earlier this month, Etsy reported its second-quarter earnings for the period ended June 30. Q2 sales of $628.9 million grew by 7.5% year over year. Its net income declined by 15% but that was largely a result of asset impairment charges, which added $68.1 million in expenses during the period that weren't there a year ago.
Impairment charges are nonrecurring, so the good news is that Etsy's bottom line should be able to bounce back from the dip in earnings. The more important issue relates to the company's growth. The items on Etsy's marketplace are generally more expensive than what users will find on eBay, particularly as Etsy's focus is on quality, handmade products. And while the company's growth was strong during the early stages of the pandemic, things have slowed down -- drastically.
ETSY Revenue (Quarterly YoY Growth) data by YCharts
The company anticipates that for the current quarter, its revenue will total between $610 million and $645 million. Even under the best-case scenario, it sees its top line rising by less than 3%. That's not a huge growth rate. And what makes things worse is that the stock isn't cheap, either.
Etsy's valuation could be due for more of a trim
Investors are currently paying a multiple of 23 times Etsy's estimated future earnings. Not only is that higher than the S&P 500 average of 20, but it's even higher than what investors are paying for shares of eBay, which trades at less than 11 times its future profits.
Based on that, it's hard to make the case that Etsy is a cheap buy and a better alternative than rival eBay. And with its sales potentially declining next quarter, it's possible that there may be even more of a sell-off in the not-too-distant future. Although it's trading at a 52-week low, the growth stock is still trading above pre-pandemic levels.
Should you buy Etsy's stock?
Analysts are generally bullish on Etsy's stock, projecting that it could rise by over 50%. And even though price targets have been coming down, many of them remain above $100. I don't share that optimism, however, and I wouldn't be surprised if there were more reductions to those price targets as the year goes on, especially if Etsy has another underwhelming quarter this year. Now is a time consumers may be cutting back on unnecessary expenses, and Etsy's marketplace may struggle as a result of that.
Etsy's business should be able to post stronger profits this year as its gross margin is typically strong at around 70%. But with the headwinds the company is facing right now with consumers' discretionary income continuing to dwindle, investors should brace for some much more challenging quarters ahead for the business. For now, the best option is to take a wait-and-see approach with the stock because its value may continue to decline as the year goes on.
