After experiencing a 700% run in less than a year’s worth of trading, shares of Etsy (NASDAQ: ETSY) are learning that what goes up, must come down. Since the last week of April, they’ve fallen as much as 25% and investors and Wall Street alike are sizing up a potential opportunity. Is this a great entry point, or is there a risk you’d be catching the proverbial falling knife?
They’d been consolidating their gains for much of the first quarter of this year, as the jaw-dropping rally that arose from the depths of last year’s crash took a breather. A solid Q4 print in February ensured that Etsy shares weren’t going to become known for a COVID driven flash in the pan pop that degenerated into a slow drip lower like Zoom (NASDAQ: ZM). At least not anytime soon, and with revenue for the quarter up 128% on the year, there weren’t many looking to sell just yet.
But maybe it was recognized by some at the time that Q4 was going to be the last quarter reported which didn’t lap the pandemic-inspired jump in e-commerce activity. If so, then they would have done well to lock in some gains as Etsy shares are well and truly in correction mode now.
Aside from general softness seen in tech and growth stocks as a result of the higher interest rate environment, the main reason for the current drop is Etsy management’s bearish guidance from last week’s earnings report. Despite revenue jumping more than 140% and crushing expectations along with bottom-line EPS, the forecast for Q2’s revenue was revised lower and this seems to have spooked investors big time. Shares had already been trending downwards but in the aftermath of the report they opened with a gap down of 10% and continued falling for the day.
The Bull Case
For those of us in the position of spectator, a drop like that in a stock that’s pumping out triple-digit percentage revenue growth numbers will certainly raise some eyebrows and more than a few questions. And for those of us with long enough investment horizons, there’s definitely a bull case to be considered as a potential answer.
Last Friday, before markets shut for the weekend, Stifel were out with a quick upgrade to Etsy shares. They moved them up to a Buy rating from a Hold on the basis that the current dip was making shares approach oversold conditions. In a note to clients they said “while it is early in the transition to a mobile society, this stock sell-off sure seems like a good time to position for the other side given how much the pandemic has driven lasting benefits to the Etsy platform."
Let it not go unnoticed, but this is an e-commerce platform that attracted 16 million new users last quarter, while habitual user numbers jumped more than 200% at the same time. There’s a lot to be said for owning shares in a company that’s growing with such momentum, and all the more so as a fairly normal earnings speed bump takes a chunk off the price.
Josh Silverman, Etsy’s CEO, struck a realistic note on the near term outlook and a bullish note on the long term, saying “we currently expect Q2 2021 GMS to decelerate along with the rest of e-commerce as we lap the tremendous 2020 growth rates. That said, we'll keep the pedal to the metal in 2021 to continue to improve our customer experiences, make Etsy top-of-mind for the millions of buyers who have found Etsy for the first time or are relying on us now more than ever, and further invest in our very large market opportunity."
Long Term Play
Even KeyBanc, who were switched on enough to warn investors about a potential weak forward guidance from management back in April, said in the same statement that they consider Etsy one of the best “long-term growth opportunities
” out there. One of the reasons for this as Evercore ISI pointed out in the week prior is due to Etsy’s massive total addressable market (TAM) which has still to be comprehensively scaled into. Their current expansion momentum speaks for itself and all the signs are there that this TAM will continue to be addressed at neck breaking speed, meaning this 25% dip in shares won’t be long being gobbled up.
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