Is Etsy crafting support to end its five-month bearish trend?

Etsy Inc. NASDAQ: ETSY has been crafting a downtrend but may be stitching up a bottom to its year-long slide.

On November 1, the online marketplace for handmade and vintage items posted earnings growth for the first time since December 2021. Revenue grew by 7% to $636.3 million. 

A look at MarketBeat's Etsy earnings page shows the company exceeded analysts' expectations on the top and bottom lines in the past two quarters.

So why not more excitement? 

To answer that, look at what's on the horizon. Analysts expect earnings to grow 59% this year to $4.30 per share, with growth of 6% next year to $4.56 per share. Both those forecasts were revised lower recently. 

In the third-quarter conference call, Etsy CEO Josh Silverman pointed out significant pressure on consumer discretionary product spending including high inflation, elevated interest and mortgage rates, and declining savings balances, leaving little margin.

Increasingly competitive retail environment 

"These issues are magnified for lower-income buyers, and we feel the impact on the Etsy marketplace," Silverman said. "We're also experiencing an increasingly competitive retail environment with a very heavy emphasis on deep discounting and in some cases competitors investing in potentially unsustainable levels in marketing and promotions."

In filings, Etsy lists competitors including Amazon.com Inc. NASDAQ: AMZN, eBay Inc. NASDAQ: EBAY, Alphabet Inc. NASDAQ: GOOGL, Alibaba Group Holding Limited NYSE: BABA and Meta Platforms Inc. NASDAQ: META. 

Clearly, those are big companies with deeper pockets than Etsy and are likely in a position to offer some steep discounts to drive volume. 

In its most recent annual report, Etsy said, "Many of these competitors offer low-cost or free shipping, fast shipping times, favorable return policies, and other features that may be difficult or impossible for our sellers to match."

While Silverman's and the company's assessment of Etsy's competitive market position is accurate, his verbiage in the earnings call didn't seem to inspire investor confidence. 

Green shoots evident in Q3

However, Silverman also alluded to "green shoots" that were evident in the third quarter. 

For example, the company has made improvements to how sellers can list their items and is perfecting its algorithms with machine learning and artificial intelligence. It also implemented new promotions to move goods faster. 

Being top-of-mind for consumers is also a challenge. Silverman said only 12% of buyers consider Etsy top of mind as the place to shop for gifts, with association levels even lower for other major categories like home and living and style. 

Another reason the stock didn't rally higher on the earnings and revenue beat: Guidance for the current quarter was weak, as the company forecast a small decline in gross merchandise sold. Management added that the situation could deteriorate if conditions worsen for consumers. 

Etsy's smaller size makes it more volatile

As a midcap stock, Etsy is not tracked in the S&P 500, although it's considered a consumer discretionary stock. Its smaller size also makes the stock more volatile than larger online sellers.

For example, Etsy's beta is 1.86, implying that the stock is about 1.86 times more volatile than the overall market, indicating higher risk. 

Stocks with a smaller market capitalization are generally more susceptible to market fluctuations, as they have less liquidity and potentially less stability.  

A look at the Etsy chart shows the stock has recently found a floor above its November 2 low of $58.20. 

Buyers supporting stock above recent low

That suggests potential support, indicating that buyers are willing to step in above that prior low, preventing further decline, at least for now. 

As of yet, it's too soon to say that the bearish sentiment is reversing. Etsy's current bearish trend has been in place since a failed rally attempt in early June, when upside trade was accompanied by low volume, meaning buyers had less conviction than sellers. 

That trend is continuing. The stock's up/down volume ratio is 0.7, meaning that the trading volume for declining stocks is 30% higher than that of advancing stocks.