Etsy Stock Is Manufacturing More Problems (ETSY)

Etsy's move to pair creators with small manufacturers shifts ETSY stock further from its artisanal roots

When news first broke that e-commerce platform Etsy (ETSY) was taking its Brooklyn business to Wall Street, a couple things set the company apart from other publicly traded picks.

Etsy Stock's Problems Are Far From Over (ETSY)The most obvious was Etsy’s artisanal focus. The company’s marketplace, which boasts nearly 1.5 million sellers and over 21 million buyers, focuses primarily on handmade, arts-and-crafts-type products.

The second differentiator was Etsy’s moral high ground. Etsy is a certified B Corporation, which means the company has agreed to use its business “as a force for good.”

Since Etsy stock went public in April, though, both of those distinguishing characteristics have been tarnished … and so has its share price.

For starters, the company’s moral high ground and supposed transparency were called into question a couple months ago when headlines began pointing out that Etsy set up an Irish subsidiary.

Meanwhile, Etsy stock went public at $16, rose as high as $35 on its first day of trading and has since sunk. Shares are currently going for just over $14.

And for the cherry on top, Etsy just announced a new program called Etsy Manufacturing that shifts the marketplace even further from its artisanal roots.

The Catch-22 of Etsy Stock

In a nutshell, Etsy Manufacturing will help match sellers with small-scale manufacturers. While Etsy originally had strict rules forbidding outsourcing of any production, it loosened them a couple years ago, allowing for outsourcing on a case-by-case basis.

Etsy Manufacturing goes from allowing to encouraging.

It’s easy to understand the potential upside that could come from this move. Once again, Etsy stock is getting clobbered and the company is going to have to show a profit for investors to get back on board.

In the most recent quarter, Etsy posted a loss of $6.4 million, which put the company twice as far in the red as it was a year before. While general merchandise sales and revenue growth came in strong at 25% and 45% respectively, that wasn’t enough to offset 50% growth in operating expenses.

Toss in a third-quarter warning about currency exchange rates, and Etsy stock investors couldn’t find the exits fast enough.

But that brings us to the catch-22 of Etsy stock — and of all companies that hang their hats on an artisanal feel. While Wall Street is always going to crave more growth, the original brand and concept that set Etsy apart could become collateral damage of its expansion.

When success comes because you’re small and niche and homey, too much success can unfortunately stomp on those very characteristics.

This was the case for Francesca’s Holdings (FRAN), for instance — a company that sprung up and caught on quickly thanks to its boutique-style stores, but which has struggled as it tried to expand.

So far this year, Francesca’s stock has lost around 30% of its value.

Bottom Line

Add it all up, and Etsy stock still has a lot to prove to Wall Street before it begins gaining ground.

Etsy Manufacturing makes sense for ETSY from a business perspective, but less so from a branding one.Investors generally care more about business metrics than brand, but in this case the two are very much intertwined.

Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Forbes, Business Insider, MSN Money and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.

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