ETC stock: Near-term challenges, but compelling long-term (NASDAQ:ETSY)
john penney
In February of this year, I concluded that Niche is good at this ETC (NASDAQ:ETSY) Stocks were under heavy pressure amid a fall in the name of technology, while the world was at the forefront of a major political event.
I concluded that Etsy was facing tough comparisons with the pandemic fading away, yet I still like the platform’s long-term status and uniqueness compared to many other peers. Trading at 40x Earnings Multiple, I am happy to start buying dips there.
pre tech
Etsy is a marketplace for unique and creative goods, connecting millions of sellers with tens of millions of buyers looking for non-standard merchandise in a treasure hunt to keep e-commerce more human. These terms create greater engagement and loyalty of users as Etsy can hereby attract less issues surrounding distrust and consumer groups.
The company more than doubled sales in 2020 to $1.7 billion, reporting real and large GAAP earnings of $350 million, or $2.70 per share. It was a massive achievement, yet with shares peaking at $250 in 2021, the resulting $35 billion valuation translates into a 20-times sales multiplier and nearly 100 times earnings.
Shares declined slightly in the spring of 2021, as Etsy pursued dealmaking in the months following a $1.6 billion deal to acquire fashion resale marketplace Depop, on a larger and equivalent sale whose own shares were trading. . This was followed by a low pullback share in November of last year reaching a high of $300, and soared several times higher. The resulting $45 billion peak valuation equated to more than 20 times sales of $2.1 billion and 100 times earnings just shy of half a billion.
As of February of this year, the shares have fallen substantially to just below an enterprise valuation of $20 billion, which translates to a sales multiplier of nearly 10 times and earnings of 40 times earnings in real terms. It began to sound compelling, while 18% revenue growth slowed in the third quarter, with the number of active buyers growing 38%. This highlights the low activity of existing buyers/users, but on the other hand it confirms the popularity of the platform. Based on all these observations, I began opening a short position at $120s, from which I cut a short position at $150s in the weeks that followed.
As May’s shares essentially halved again, it is now trading at $80 and despite this dramatic move turning low, shares are again up 20% from lows.
What happened?
Later in February, Etsy reported its fourth-quarter results with growth slowing to 16% as revenue jumped to $717 million, for the annual number of $2.3 billion. GAAP earnings rose 9% to $161 million, as full-year earnings jumped more than 40%, falling a few million dollars to $500 million. The company has yet to provide full-year guidance, but has noted some headwinds in operations, amid pressure on consumer spending in view of political and economic events.
In May, first-quarter results came in a bit of light with the pandemic fading, as total GMS rose 3% to $3.3 billion, with a smaller decline in the core Etsy business. Reported revenue was up 5% to $579 million as meaningful gains retreated, with net income falling from $144 million to $86 million as a result of slower growth. In addition, the company guided for flat results, with second-quarter sales clocked at the midpoint of $565 million, indicating that no quick recovery is in sight.
147 million shares now trade at $80, translating to a valuation of $11.8 billion, or about $13 billion if we factor in net debt. This lowered the sales multiplier to about 5-6 times, yet half a billion earnings out of the question, perhaps approaching $300 million at the current run rate, raising expectations again to 40 times earnings.
and now?
The truth is, the stock’s price has dropped significantly, essentially three-quarters down from its highs half a year ago. It’s clearly not a time of recession, yet the appeal has partially improved, with earnings multipliers down significantly, but the company remains incredibly profitable with respect to revenue.
Still, the multiplier of about 40 times earnings remains in great demand, as earnings have fallen sharply, as other trends certainly create real headwinds as well. Higher interest rates clearly hurt valuations in terms of the discount factor and many applicable to the business, as the modest net debt now also incurs some higher interest costs to the company.
The bigger issue is that consumers are facing lower demand with the opportunity to spend money outside again after the pandemic subsides, with higher interest rates, inflation and less to spend among other headwinds. is with money. Furthermore, many sellers have traded the platform as well, amid high commission rates and lengthy payment terms, hurting their income and making them aware of how reliable they are on the platform. This is regardless of the platform’s specific status, as loyalty among all participants was always the major strength of the business.
add here
After making a partial round trip on my initial position at $120, I find myself trading near break-even in that position. Yet this position is very small, as the continued reset in valuations makes me cautiously optimistic, despite declining first-quarter profit and a softer earnings outlook for the second quarter. Overall, it remains a solid platform, well positioned when demand picks up again.
