Etsy Inc (NASDAQ:ETSY) has had a tough 2017. Founded in 2005 as a site to sell homemade and vintage goods, it went public in 2015 with an idealized mission of both doing social good and providing a marketplace for artists.
But in the quarters after the IPO, Etsy wasn’t profitable as expenses piled up, including the build-out of its beautiful and quirky headquarters in Brooklyn New York which opened in 2016.
Double the size of its former building, the 200,000-square foot space had perks such as weekly yoga and meditation classes, quiet space rooms, an outdoor courtyard, an Etsy dining hall which served catered meals twice a week, and free organic snacks on each floor.
Yet the board, and other large investors, started to get worried about the lack of progress regarding profitability or sales growth.
Layoffs and a New CEO for ETSY Stock
In May 2017, Etsy did the first of its two big, mass layoffs, laying off 80 people and then another 140 people in June 2017.
In total, it resulted in a 22% reduction in the work force.
That number included the veteran CEO who headed ETSY for 6 years, including through the IPO process. He was replaced with outsider, but board member, Josh Silverman.
These events were a shock to the company’s culture.
Formidable Challenge from Amazon
While Etsy was embroiled in chaos, Amazon.com, Inc. (NASDAQ:AMZN) launched Handmade at Amazon, its answer to Etsy.
Amazon rarely breaks out the data from its separate units, so it’s unclear how well Handmade is doing.
But what happens when Amazon launches in a market is, it makes the other competitors better. Etsy and eBay Inc (NASDAQ:EBAY) were no longer the only game in town. If you’re going to compete, you have to step it up.
Getting in the Game
Over the summer of 2017, when the layoffs and CEO change occurred, Etsy initially said it was pausing its brand marketing for the rest of the year.
However, that appears to have been a temporary hold, as this holiday season it ran its first-ever Cyber-Week promotional campaign which guaranteed delivery of three days or less on 20 million items.
The surge in cyber sales this holiday season, overall, should spell good news for Etsy this quarter.
In another positive sign, the Board of Directors authorized a $100 million share buyback, a first for the company, in November.
Etsy Is Turning Around Earnings
2017 is the first year Etsy is expected to be profitable as a public company. It’s come with a lot of pain.
Here are its earnings, and expected earnings over the last 5 years:
- 2014: lost 36 cents
- 2015: lost 21 cents
- 2016: lost 7 cents
- 2017: expected to make 38 cents
- 2018: expected to make 29 cents
While 2018 shows a 21% decline in earnings heading into 2018, I believe this number is conservative and we’ll see revisions as the year rolls on.
But estimates are heading in the right direction. New management is going to need more than just a few months to turn it around.
Etsy isn’t a value stock. It has a forward price-to-earnings ratio of 74. You’re buying it for the growth.
Betting on Etsy’s Strong Brand
Etsy’s sellers, as well as its buyers, have been notoriously loyal to the Etsy brand over the last 12 years.
When it went IPO in 2015 it had 20 million buyers worldwide. Last quarter, that number had jumped to 32 million.
I’m betting on that loyalty in 2018 as it takes on Amazon while still providing one of the most attractive platforms for artists to sell their unique goods online.
Tracey Ryniec is an Equity Strategist and Portfolio Manager at Zacks Investment Research. She manages the Insider Trader and Value Investor services. As of this writing, she did not own shares of any of the aforementioned securities.