Etsy Inc. (ETSY) is about the most ridiculous thing on Wall Street right now … and that’s saying something.
For those unfamiliar with ETSY stock, the company is an e-commerce site geared towards the weird and whimsical. Like eBay Inc. (EBAY), Etsy Inc. itself is not making anything — simply peddling stuff that individual merchants choose to list there.
Like this four-headed duck taxidermy – and steal at under $175!
ETSY stock has been billed as the nexus of the “sharing economy,” where artists come together to sell their crafts from the comfort of their own home … and Etsy Inc. takes a small fee for helping build that community.
But it will not come as a shock to you, I’m sure, that Etsy has never made an annual profit according to its official S-1 filing. Nor will it come as a shock to you who haven’t been watching ETSY stock to learn that, despite strong pricing on its first day of trading, the site known for its whimsical, hand-made stuff has managed to lose 40% of its value in a matter of weeks.
What’s amazing is that this kind of company could spin up the hype machine so well and see its IPO so well subscribed that it could be in the position of dealing a 40% loss to anyone!
Etsy stock is clearly one of the biggest jokes on Wall Street … and just like always, that joke is on greedy small-time investors who didn’t do their research and dove in to a frothy IPO at precisely the wrong time.
ETSY Stock By the Numbers
The narrative of Etsy stock is precisely the kind of drivel that over-inflated the dot-com bubble: internet connecting creative minds worldwide … and a benevolent tech company simply there to help them all along! (And collect a modest fee, of course.)
But the problem with these kind of schemes is that they always bank on the limitless potential of the internet paying off at some unforeseen date … and a present circumstance that is quite unsustainable.
There’s a reason that Etsy Inc. has talked about “reimagining commerce” so much. It’s because the current reality of its commerce is quite painful to behold.
Consider that ETSY stock, according to its IPO documents, managed to lose about $15 million last year despite revenue of about $195.
Also disturbing: In 2013, the company boasted $125 million in revenue on $76 million in operating expenses. Those numbers turned into the aforementioned $196 million in revenue and $128 million in expenses last year.
So while revenue did grow 57%, expenses grew at a much larger 67% clip — hardly a sign that ETSY stock is on the path to profitability.
Even more crazy? While it’s impossible to calculate a P/E ratio on ETSY stock (price-to-earnings ratios, naturally, require some kind of earnings for there to be some kind of ratio) the price/sales of Etsy have been greater than even the most overhyped tech stocks.
At an IPO pricing of $16 a share, Etsy was valued at roughly $1.8 billion — more than 9 times last year’s sales. That’s greater even then cult tech stock Tesla Motors Inc (TSLA) and more than Chinese internet giant Baidu Inc (ADR) (BIDU)!
You think a company that sells whimsical, hand-made trinkets is worth a higher multiple then Elon Musk’s ascendant electric vehicle company or the Google Inc. (GOOG) of China?
Etsy IPO Screws the Little Guy… Again
The icing on the cake here is that despite these disturbing metrics, Etsy stock managed to pull off a “successful” IPO that priced at the top end of its range a few weeks ago, at $16 per share.
And on top of that, it got a massive first-day pop to trade at almost $30 per share — briefly valuing the stock at more than $3 billion!
But insiders who were awarded shares didn’t get fleeced. Those who were first in the door at the aforementioned $16 price are still slightly ahead — presuming they’re able to sell yet, which many insiders cannot do because they are subject to an October lockup expiration.
The only people who really suffered that 40% loss were the fools who were left out of the IPO and raced in to buy shares at a premium on the first day of trading.
I guess I shouldn’t be surprised by that. It’s the same as it ever was, with underwriters making a mint in fees and offering exclusive access to their very best (and richest) clients, while the sheep eagerly wait to get sheared on the public markets.
Still, the sheer gall of pulling this off with Etsy is noteworthy. It makes you think about just how frothy this market is when a company like this can command that kind of premium, even for a moment in time.
Or put more precisely, the fast 40% flop in Etsy makes you wonder how long it is before investors notice the rest of the market is built on a whimsical fantasy, too.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.