We’ve opened a new bearish trade on Etsy (ETSY). ETSY picked a tough time in the market to have its initial public offering (IPO).
Sure, after Etsy listed the stock’s IPO price at $16, the stock jumped as high as $35.74, but it has been a steady decline since then. Following the company’s first earnings announcement on May 19, the stock dropped to $17.20 and continued to drift lower, finally reaching a low of $12.80 on July 6. Since that time, the stock has been rebounding — enjoying a massive surge on July 17 after being mentioned during Google’s (GOOGL) earnings conference call — but we expect this rebound to be short-lived as we head into ETSY’s next earnings announcement on Aug. 4, after the market closes.
ETSY is facing a number of headwinds. First, its gross merchandise sales (GMS) growth is slowing. GMS grew by 43% in 2014, but according to ETSY’s last earnings announcement, growth has slowed to 28.2%. This is not good for a stock looking to command a high earnings multiple. Part of the slowdown was due to a rising U.S. dollar, and unfortunately for ETSY, the value of the USD is still high.
Second, the company is spending more — especially in marketing — to generate smaller incremental gains. Third, Amazon (AMZN) announced it is launching an ETSY competitor: Handmade. Anytime AMZN steps into a new market, the current participants in that market take a hit. Watch for AMZN to steal market share from ETSY. Fourth, much of the recovery in ETSY’s stock price seems to be short-squeeze driven. If the company reports lackluster earnings, the short squeeze should subside.
We anticipate ETSY is going to drop back down toward support at $15 — the level the stock hit in early-June. Of course, it could drop down low enough to challenge its recent lows, but we are being a little more conservative in our expectations.
‘Buy to open’ the ETSY September 15 Puts (ETSY150918P00015000) for a maximum price of $1.45.
We continue to the hold the Adobe (ADBE) calls we recommended, but we suggest taking profits in the Crocs (CROX) puts trade we opened last week. Our SlingShot Trader members get our real-time recommendations and text alerts telling them when to take action, and we were able to capture 97% profits on the CROX puts.
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