November 30, 2023
Etsy Bulls Bet Stock’s Bad Run Is About to End

(Bloomberg) — Wall Street is optimistic that the situation may be turning for one of the worst-hit stocks on the S&P 500 index.

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According to the compiled data, the second weakest performing online marketplace on the index since the end of 2021 was Etsy Inc. It’s now seeing a record number of analyst buy ratings, while its average price target represents an upside of nearly 70% from current levels. By Bloomberg – after the stock’s value has fallen by more than two-thirds over the past 21 months.

“ETC could provide a very attractive entry point,” said David Klink, senior analyst for equity research at Huntington Private Bank. “We’re increasingly realizing that the next driver of growth is going to be diversifying your portfolio, and maybe increasing some of those bets on underperforming stocks.”

The latest vote of confidence came from Wolfe Research, which last week raised its rating to the buy-equivalent of Outperform. According to analyst Deepak Mathivanan, Etsy has several ways to improve profitability in the coming years through increased consumer spending or cost cutting.

“At a high level, we think Etsy shares could outperform under a variety of scenarios,” Mathivanan wrote in a research note.

Of course, anyone who bet on Etsy over the past two years has been sorely disappointed. After seeing a surge in sales during the COVID-19 pandemic, when stay-at-home shoppers were spending money on homemade face masks and decorations, revenue growth has slowed. The stock, which hit a record near $300 at the end of 2021, is headed for its second annual decline of more than 40%.

This is different from other e-commerce stocks. Exchange-traded funds that track online retailers have surged this year, led by companies like Inc., Wayfair Inc. and Shopify Inc. There have been big gains from all of them, all of which have improved by more than 60%.

This divide may be related to the bigger-better-better mantra that has become prevalent this year amid rising interest rates and uncertainty about the direction of the economy. Unlike Amazon, which has a dominant market position and strong balance sheet, companies like Etsy may be viewed as more niche and discretionary, said Anthony Zackary, associate portfolio manager at Zevenbergen Capital Investments LLC.

However, part of the allure of the Etsy bull is its valuation. At 16 times estimated earnings over the next 12 months, the stock price is well below the average of 46 times over the last five years and at a significant discount to e-commerce competitors.

The problem is that Etsy’s revenue growth is much lower than before. Sales are expected to grow 7% in 2023, compared with an average of 46% over the past five years, according to data compiled by Bloomberg.

Even some bulls are unsure when Etsy shares will rebound.

“While we see upside in the mid to long term, we also believe Etsy shares may remain range-bound in the near term,” said Evercore ISI analyst Shweta Khajuria, who has an Outperform rating on the stock. Khajuria cited macroeconomic challenges, competition and high marketing costs.

Huntington Private Bank’s Klink believes Etsy is benefiting from overly pessimistic perceptions about U.S. consumers’ purchasing power and says its dropped valuation makes it compelling.

“It’s worth paying attention to,” he said.

technical chart of the day

Nvidia Corp’s selloff in recent days has highlighted the widening gap between the stock price and analyst price targets, with the average suggesting a potential return on shares of 53%. The distance between the share price and the average analyst target is at a record high for the stock.

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earnings due on thursday

–With the help of Tyagaraju Adinarayan.

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