If e-commerce stocks are making a comeback this year, somebody forgot to tell Etsy (ETSY 0.34%).
While peers like Amazon, Wayfair, and Shopify have seen their stock prices bounce back this year in response to signs that the online retail market is strengthening, Etsy has missed out on the rally.
Shares of the online marketplace for crafts and vintage items are down 47% year-to-date, missing out on the broader rally that's sent the Nasdaq Composite up 27%. The stock is now down 79% from its pandemic-era peak.
Despite that weakness, Wall Street seems surprisingly bullish on the stock. Of the 20 analysts covering the stock, the average price target calls for Etsy to gain 66% over the next year, reaching $105.60. Is Wall Street right on this one or have analysts just failed to dial down their expectations as the stock has slumped?
Let's take a look at what's been plaguing Etsy recently and the stock's potential for a comeback.
Image source: Getty Images.
The shine wears off
If you're wondering why investors seem unenthused about the online flea market's prospects, a quick look at its recent results should explain why.
Even though we're now several quarters removed from the worst of the pandemic, which crushed growth nearly across the board in e-commerce, Etsy is still struggling to grow.
Gross merchandise sales, or the total value of the goods sold on its platform, fell 0.6% to $3 billion in the second quarter. The company managed to deliver a modest bump in revenue, up 7.5% to $629 million, but that was primarily due to an increase in fees it charges its sellers, which is not a sustainable way to grow.
Etsy's margins are also moving in the wrong direction. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin narrowed from 27.8% to 26.4% in the quarter and its net profit margin was down also.
The company's "House of Brands" strategy, which drove the acquisitions of Reverb, Depop, and Elo7, is looking increasingly flawed as well. Etsy took an asset impairment charge of $68 million in the second quarter related to Elo7, and it took a $1 billion goodwill impairment charge for Depop and Elo7 in the third quarter of last year, meaning it believes it overpaid for those acquisitions by $1 billion.
After paying $217 million for Elo7 in 2021, Etsy then sold it in July for an undisclosed amount, though likely much less than it paid for it, closing the books on a forgettable misadventure in M&A.
Why there's upside
Despite that negativity, there are still reasons to see opportunity in the stock. While growth has flatlined and margins are down slightly, Etsy is still highly profitable, a rare feat in e-commerce, and its margins trounce those of Amazon, Wayfair, or Shopify.
Etsy reported $731 million in adjusted EBITDA in its last four quarters, meaning the stock trades at about 11 times adjusted EBITDA. Etsy is also solidly profitable on a generally accepted accounting principles (GAAP) basis.
And although gross merchandise sales growth hasn't yet returned, other key metrics show the business is gaining traction. It now has 8.3 million sellers across its marketplaces, up 12% from the year-ago quarter, reversing a decline last year, and sellers on its core Etsy marketplace are up from 5.3 million to 6.3 million, nearly 20% growth. Active buyers are growing as well, but more slowly.
Etsy clearly remains an attractive outlet for artisans and others looking to sell their wares, and that's another key competitive advantage of the brand, which has carved out a unique identity, selling one-of-a-kind goods online. And it faces limited competition in that space. Amazon launched its Handmade category several years ago, but has been unable to take significant market share.
In other words, Etsy still retains the qualities that have made it attractive to online shoppers and sellers, as well as those that make it a profitable business with sustainable competitive advantages.
Finally, the stock trades at a great value. In the broader retail space, sales of discretionary goods have been weak for several quarters as consumers have shifted spending to services like travel and restaurants. But demand for items like jewelry, apparel, and crafts -- Etsy's focus -- will eventually recover.
If its top-line growth can begin to gain momentum and it avoids the blunders that led to more than $1 billion worth of write-downs, the stock has considerable upside potential from here. A gain of 66% over the next year is by no means out of the question.
