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Etsy, Inc.'s Pop Last Week Was Undeserved

By Evan Niu, CFA - Jul 18, 2015 at 3:11PM

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A few words in Google's earnings call was enough to send Etsy shares soaring, but the market might be getting ahead of itself.

All it took was one sentence for freshly public Etsy (ETSY -2.78%) to soar as much as 31% last Friday. During Google's earnings conference call, the search giant's chief business officer Omid Kordestani noted, "Developers like Etsy are already seeing a boost in traffic as a result of deep linking." Deep linking is undeniably an important trend in the world of app development, as it facilitates directing users to a very specific place within an app.

Think of it this way: When you browse the Internet today, links take you to specific parts of web pages as opposed to just the home page. Developers and platform operators have been evolving deep linking in recent years, and its importance to mobile apps cannot be understated.

Yet Etsy's enviable pop was completely undeserved. Here's why.

Stumbling out of the gate
For starters, Kordestani's comment was extremely vague, and is more of a testament to deep linking technology itself -- not necessarily a vote of confidence in Etsy itself as a business. In fact, investors have been steadily losing confidence in Etsy's fundamentals. The company's first public earnings release left a lot to be desired, as it missed revenue and earnings estimates right out of the gate.

Despite healthy top-line revenue growth of 44%, Etsy posted a net loss of $36.6 million as it ramped up spending. While active sellers and active buyers both put up healthy increases to 1.4 million and 20.8 million, respectively, there have also been some concerns that some of Etsy's sellers are infringing copyrights or trademarks.

Perhaps one reason why Google's comments had such an impact is that mobile is extremely important to Etsy's financial performance. An overwhelming 58% of visits now come from Etsy's mobile app, which also contributed to 41% of the company's gross merchandise sales. Both of those figures have been steadily rising, so some level of enthusiasm over increased mobile traffic is warranted; but not that much.

There might be another contributing factor.

It was probably a short squeeze
As investor confidence diminishes, the bears like to jump in. Short interest has continued to rise throughout Etsy's short public life. At last count, there were nearly 9.1 million shares held short, or about 8% of outstanding shares.

Settlement Date

Short Interest

June 30, 2015

9.1 million

June 15, 2015

8.4 million

May 29, 2015

6.8 million

May 15, 2015

3.1 million

April 30, 2015

2 million

Source: Nasdaq.

It's possible that last week's pop on heavy trading volume was, in part, driven by short-sellers buying shares to cover their positions. If that's the case, investors shouldn't overanalyze the move, because it says nothing about the actual business.

Amazon is coming after Etsy
Etsy is priced for considerable growth, currently trading at 11.2 time sales, but it will face intense competition going forward as larger rivals take notice of the niche in which it operates. None other than e-commerce kingpin Amazon.com (AMZN -1.13%) has just stepped in the handcrafted ring. In May, Amazon launched Handmade, a marketplace devoted to -- you guessed it -- artisans making unique, handcrafted goods.

Source: Amazon.

Amazon has been actively trying to poach sellers by sending them invites, and it has a lot to offer in the form of a vast distribution network with expedited shipping. Plus, Amazon has more than10 times as many active buyer accounts than Etsy, not to mention traffic and brand strength.

More importantly, Amazon is, hands down, the most ruthless e-commerce competitor there is, and is almost always prepared to lose vast sums of money in order to crush rivals into submission. Remember Diapers.com, or any number of companies that have fallen victim to Jeff Bezos?

Etsy's jump will likely be shortlived.

Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Etsy,, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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