Etsy Stock Impresses, But Long-Term Concerns Remain

ETSY stock - Etsy Stock Impresses, But Long-Term Concerns Remain

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In a world that’s increasingly focused and competing in the technology sector, the arts and crafts market seems woefully anachronistic. When I first heard about Etsy (NASDAQ:ETSY), I doubted its ability to resonate with consumers. Who, after all, even buys personal trinkets in this smartphone era? One look at ETSY stock, though, proves how wrong I was.

The e-commerce platform has been a pleasant surprise since the beginning of 2016. Over that timeframe, ETSY stock has profited an astonishing 415%. Even more impressive, this statistic isn’t just built from a particularly outstanding period. For example, on a year-to-date basis, shares are already up nearly 107%. Seemingly, this arts and crafts version of Amazon (NASDAQ:AMZN) can do no wrong.

Indeed, the only real hiccup in the markets occurred shortly after its initial public offering (IPO). In 2015, ETSY stock closed out its initial year losing shareholders more than 72%. Against its IPO price, the company lost 47%.

That’s all in the past. Those investors who kept the faith have been well rewarded. Even those who bought at the stock’s previous all-time high have not only made their money back, but are profitable.

Every success story, though, has its critics. For ETSY stock, detractors may point to the disjointed underlying sector. On one hand, the creative industry generates $44 billion for the economy. Moreover, demographic trends indicate that an increasing number of American households engage in arts-related activities.

On the other hand, arts-and-crafts related toy sales have tanked earlier this decade. Worse yet, sales in this subcategory have consecutively declined since 2014. And if this sector was truly robust, somebody forgot to tell industry leader Michaels (NASDAQ:MIK). MIK stock is down nearly 17% YTD.

Roundly Impressive Results for Q2

In some ways, the Street tuned into Etsy’s second quarter 2018 earnings report not only as a reflection of a single company’s performance but also as the viability of a retail market. If the numbers say anything, investors can look forward to continued gains.

Although the Q2 results were mixed, the markets responded positively to the overall story. For earnings per share, consensus estimates targeted four cents. The actuals came in a penny lower. Management disclosed that noncash foreign-exchange losses caused an impact of $4.5 million, or four cents per diluted share.

The revenue picture is where things truly came alive for the company. Covering analysts on average expected to see $127.1 million. Instead, Etsy hit the ball out of the park, ringing up $132.4 million, or a 4.2% positive surprise. This was also a massive 30% lift from the year-ago quarter.

The good news didn’t stop there. Management raised sales guidance for 2018 in a range between $587 million and $596 million. In the last read, the leadership team forecasted $582 million to $591 million. After absorbing the incredibly bullish news, ETSY stock jumped 8.5% in afterhours trading.

Indeed, if any onlookers wanted confirmation that the arts and crafts sector was the real deal, and not just a fluke, they certainly received it. The latest financial disclosure represented six consecutive quarters of rising sales growth on a year-over-year basis. Starting from Q1 2017, Etsy reported sales growth of 18.4%, 19.1%, 21.5%, 23.7%, 24.8%, and 30.2%.

Moreover, since Q1 2014, top-line growth averages a remarkable 36.8%. Even on a sequential quarter-to-quarter basis, growth averages 7.6% over the same timeframe. Sequential analyses are unfair to retailers due to sharp seasonality spikes. Despite this disadvantage, ETSY stock looks impressive.

ETSY Stock Has No Weaknesses, Which Is Its Weakness

On the surface and below, Etsy appears to have pulled off a miracle: generate a viable business in a market that’s seemingly irrelevant to the current generation. As a result, ETSY stock benefits from the perception that it has no weaknesses.

But when something’s too good to be true, it usually is. I’m not trying to cast doubt on the e-commerce company: it truly produced outstanding results, and I wish management further luck. I might even sell a few trinkets of my own through their platform.

But as an investment, I just have to question the upside probability from where we currently stand. Not only is the low-hanging fruit gone, I don’t think any more fruit exists.

Because no matter where I look, the evidence indicates that younger people don’t care about arts and crafts. You can approach this topic anecdotally. How many college-aged adults and younger kids don’t have their heads firmly attached to their smartphones 24/7? Arts and crafts are the last things on their minds.

If you don’t trust your senses, trust the library of sociological studies. Invariably, you’ll find that young people do not care about “analog interests.”

So while ETSY stock is riding a much-deserved resurgence, the underlying company’s longer-term viability is questionable at best. Plus, shares are already at record-high levels. If you want an e-commerce play, better opportunities abound.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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