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Why Etsy Inc. Stock Plunged Nearly 25% in May

By Demitri Kalogeropoulos - Jun 3, 2015 at 6:21PM

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Was it a meaningful move or just noise?

What: Online marketplace Etsy's ( ETSY -5.57% ) stock fell nearly 25% in May, according to S&P Capital IQ data. The plunge put shares just below the initial public offering price of $16 per share. However, the stock is down 50% from the trading price it quickly reached after the April 16 IPO.

ETSY Chart

ETSY data by YCharts.

So what: Shares found more eager sellers than buyers in May due to several pieces of news that investors found worrisome. For one, Etsy announced slowing sales growth in its first quarterly report as a public company. The retailer posted a 28% gain in gross merchandise sales, solid improvement that was nonetheless far below the 46% bounce Etsy booked for its 2014 fiscal year. 

Second, earnings were hurt by surging expenses. Etsy ramped up marketing spending by 64%, which helped push overall costs higher by a whopping 73%. Management plans to keep investing heavily in marketing for the time being.

Finally, many investors might have jumped ship in May after hearing that is prepping a competing service called Handmade that will offer sellers a potentially huge market for their crafted goods.

Now what: Etsy's established brand, along with its 1.4 million active sellers and 21 million buyers, give it a strong position to defend. The company has, after, all, been in business for 10 years.

And there's no reason why Etsy couldn't succeed even if Amazon does as well. "This is a large market opportunity at the convergence of macro trends and employment, commerce, consumption and manufacturing and Etsy is well positioned," CEO Chad Dickerson told investors last month. Still, Wall Street's wildly swinging projections for this business promise to keep the stock extremely volatile -- at least until Etsy has a few quarters of public earnings reports under its belt.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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