Online marketplace Etsy Inc., which has held the second-weakest position on the index since late 2021, is now experiencing a surge in analyst buy ratings, as reported by Bloomberg. This development comes after the stock of Etsy witnessed a staggering decline of over two-thirds of its value in the past 21 months.
David Klink, Senior Analyst of Equity Research at Huntington Private Bank, noted, “Etsy may provide a pretty attractive entry point. We’re starting to increasingly feel like the next driver of growth is going to be diversification in your portfolio, and maybe beefing up some of those bets on underperforming stocks.”
Wolfe Research recently added to this wave of confidence by upgrading its rating to the buy-equivalent of outperform. Analyst Deepak Mathivanan highlighted several avenues through which Etsy could enhance profitability in the coming years, including increased consumer spending and cost-cutting measures.
“At a high-level, we think Etsy shares could outperform under various scenarios,” Mathivanan stated in a research note.
However, investors who placed their bets on Etsy in the last two years were met with disappointment. Despite experiencing a surge in sales during the Covid-19 pandemic due to increased demand for homemade face masks and decor, revenue growth has since slowed considerably. The stock value of Etsy, which reached a record high of nearly $300 in late 2021, is on track for its second consecutive annual decline of more than 45%.
This stands in stark contrast to other e-commerce stocks. An exchange-traded fund monitoring online retailers has shown a strong rally this year, driven by substantial gains from industry giants like Amazon.com Inc., Wayfair Inc., and Shopify Inc., all of which have seen growth of over 60%.
This divergence may be attributed to the prevailing belief in the ‘bigger is better’ approach this year, driven by rising interest rates and economic uncertainty. Unlike Amazon, which holds a dominant market position and boasts a robust balance sheet, companies like Etsy may be perceived as more specialized and discretionary, according to Anthony Zackery, Associate Portfolio Manager at Zevenbergen Capital Investments LLC.
Yet, one of the compelling aspects for Etsy enthusiasts is its valuation. At 16 times projected earnings for the next 12 months, the stock is significantly below its five-year average of 46 times, and notably cheaper than its e-commerce counterparts.
The caveat, however, lies in Etsy’s dwindling revenue growth. Bloomberg data indicates an anticipated 7% expansion in sales for 2023, a stark contrast to the 46% average over the past five years.
Even among the optimists, there remains uncertainty about when Etsy shares will make a decisive upturn. Shweta Khajuria, an analyst at Evercore ISI, who maintains an outperform rating on the stock, remarked, “While we see upside in the mid-to-long-term, we also believe Etsy shares could remain range-bound in the near term,” citing macro-economic challenges, competition, and elevated marketing costs.
David Klink of Huntington Private Bank believes that Etsy stands to benefit from overly pessimistic assumptions about the purchasing power of US consumers, emphasizing that its undervaluation presents a compelling opportunity. “That’s worth taking a swing at,” he affirmed.