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Investors Should Wait to Buy Etsy Stock Despite Earnings Beat

Etsy - Investors Should Wait to Buy Etsy Stock Despite Earnings Beat

Source: Meaghan O'Malley via Flickr (Modified)

The quest of Etsy Inc (NASDAQ:ETSY) to improve itself and boost its performance continues. The Brooklyn, New York-based specialty retail platform reported yet another earnings and revenue beat in its Q1 earnings announcement. With a new CEO and a sharper focus, the Etsy site conducts record amounts of business and continues its double-digit growth.

However, Wall Street has taken notice. With a high valuation moving ahead of an impressive growth rate, investors should wait before buying a stake in Etsy stock.

ETSY stock sold off despite reporting solid growth

On Tuesday, investors received favorable Etsy stock news as the company reported Q1 earnings per share (EPS) at 10 cents. This number came in 5 cents per share higher than analysts had estimated. The company lost less than 1 cent per share in the same quarter last year.

Revenues of $120.91 million also beat expectations by $1.59 million. This represents 24.8% year-over-year revenue growth for the company. Users have driven more revenue to the platform as gross merchandise sales (GMS) rose 19.8% year-over-year to $861.08 million.

Despite the strong numbers, traders punished the Etsy stock in Wednesday trading, sending the stock down by over 4.5%. Since most of the metrics indicated nothing but robust growth, investors may have used the occasion to take profits. The stock’s value has nearly tripled over the last 12 months.

Etsy has become better positioned to compete

When Josh Silverman took over the CEO position in May 2017, he instituted four key initiatives. With these focus points, Silverman sought to build trust in the Etsy brand, as well as to improve search, marketing, and seller tools. The results have now translated into higher revenue and earnings growth.

Many also feared a move by, Inc. (NASDAQ:AMZN) into the craft space would sink Etsy. However, few associate Amazon with handcrafted goods. Hence, Etsy appears to have fought off this competition despite facing a more heavily resourced e-commerce peer.

This makes sense as people tend to shop Amazon to find low prices and quick delivery of mass-produced goods. Shoppers of handcrafted goods tend to look for quality or artistry, product categories with less price sensitivity.

As for other alternatives, consumers know eBay Inc (NASDAQ:EBAY) as more of an auction site. Also, artisans who build their own site on the Shopify Inc (NYSE:SHOP) platform will likely have a more difficult time marketing their wares. Given these factors, the Etsy site better suits the needs of the small-business artisan.

Watch Valuation on ETSY Stock

Many factors serve to benefit Etsy stock, the company has moved into a strong position for growth. However, valuation may create a problem for prospective investors. The increased optimism regarding Etsy has taken the price-to-earnings (PE) ratio to 55.

This may serve as an indication that the Etsy stock price has moved ahead of company growth. The firm will see a slight slowdown in earnings this year. However, over the next three years, analysts expect average earnings growth to exceed 30% per year. And with only a $3.6 billion market cap, plenty of room for growth remains. As my colleague Laura Hoy stated, investors simply need to wait for a lower stock price.

The Bottom Line on ETSY Stock

Investors should wait for a better entry point before buying Etsy stock. Etsy again beat analyst estimates in its latest report. The changes made by Josh Silverman have tightened the focus and improved the execution of the specialty online retail platform.

While this makes ETSY stock a great hold in the long run, the equity has almost tripled in value over the last twelve months. Moreover, a massive selloff following a strong earnings report serves as a further indication that the stock price has moved ahead of earnings.

Etsy Inc has become a solid company, and I do not think Amazon or any other online competitor will succeed in pushing it aside. However, with its elevated stock price, buyers should wait before opening a position in Etsy stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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