Etsy Tailwinds Weaken, Shares Plummet
This is not the end of eCommerce or Etsy (NASDAQ: ETSY) but the boost to eCommerce provided by the pandemic is long past and the market has peaked. Esty is still growing but at the slowest pace since the pandemic began and the analysts are taking note. At least 5 sell-siders have come out with commentary since the release of Q1 earnings and the news is not good. While the Marketbeat.com consensus rating is still a firm Buy the price target continues to move lower.
The consensus price target is down in the 12-month, 3-month, and 1-month comparison and will trend lower based on the latest activity. The 5 we’ve seen all include price target reductions that amount to a target of $135 versus the $187 consensus. That’s still a premium to share prices but there is not a favorable risk/reward profile in our opinion. Assuming business does not pick up as we expect it won’t, Etsy could be in for a price-multiple contraction that could shave another 10% or 20% off of the share price.
Etsy Moves Lower On Weak Guidance
Etsy had an OK quarter in terms of performance, growth, and profitability but the results are tepid in comparison to the analyst estimates and the guidance is downright awful. The company reported $579.27 in consolidated revenue for a gain of 5.2% over last year. This is less than 100 basis points better than expected and driven by mixed internal results. The company reports a 3.5% increase in gross merchandise sales but a 2% decline in Marketplace. The good news is that sales are up triple digits from 2019 and are expected to remain at these levels, the bad news is that growth is evaporating and margins are coming under immense pressure.
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Moving down, the company reported a 600 basis point contraction in adjusted EBITDA margin they attribute to increased employee costs related to wage increases and a much larger workforce due to acquisitions. This contributed to the 41% decline in net income and a 40% decline in GAAP earnings. The GAAP EPS of $0.60 did beat the Marketbeat.com consensus by a penny, however, but that’s the end of the good news. Turning to the guidance, the company guided Q2 revenue to a range with a high end of nearly 600 basis points below the current consensus leading us to think it could fall far short of the FY consensus as well.
Institutions Shed Etsy In Q1, Don’t Expect That Trend To Change
The institutions have had a lot of confidence in Etsy over the past few years and have total ownership near 90%. The problem now is that sentiment has shifted and is weighing on price action. The institutions turned net-sellers in Q1 and have continued that trend into Q1 of 2022 shedding more than 12% of the market cap based on today’s price of $93 or so. That is a real headwind for price action and one that we do not see ending based on the Q2 outlook. In our view, institutional selling may even pick up and drive price action down to new lows.
The Technical Outlook: Etsy Moves Lower, Downtrend Intact
Etsy has been moving lower for a number of reasons that include short selling. The short interest was up near 10% at the first of the month and is likely much higher now. Regardless, price action fell more than 15% in the wake of the guidance and is trading at a new low. The move confirms the downtrend is still intact and that is supported by the indicators. The caveat with the indicators is that signs of overextension are showing up and may lead to a snap-back or relief rally at some point in the near future.
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