Editor’s note: This column is part of our Best Stocks for 2018 contest. Tracey Ryniec’s pick for the contest is Etsy (NASDAQ:ETSY).
Etsy (NASDAQ:ETSY), the global marketplace for creative goods, has had such a successful turnaround that investors can now begin to wonder where the next catalyst will come from.
The company has been through the wringer over the past 18 months with a new CEO and CFO team taking over in May 2017, which then led to large company layoffs.
But the management team moved quickly to implement its turnaround strategy, which included the risky move of raising the fee it charges merchants to be on the site.
The changes appear to be paying off, as revenue is up double digits in 2018. No one is talking about Amazon’s Handmade site nor are they talking about Amazon crushing Etsy anymore.
Etsy now has approximately 2 million sellers and 35.8 million buyers.
Things have improved so much that when the company announced that the COO was stepping down at the end of 2018 after two years at the company, it also said it would not be replacing her.
Shares have soared over 100% this year and are holding most of their gains. But has the “easy” money already been made?
The 4 Key Initiatives are Working
Remember, Etsy has a turnaround strategy in place and it entails four key initiatives.
- Improving Trust and Reliability. Its goal is to bolster trust in the Etsy brand, and by extension, to the sellers themselves since the sellers are relatively unknown. It launched a Best Seller badge in 2017 to further this initiative, which proved wildly popular.
- Enhancing Search and Discoverability. Etsy has over 50 million items on the site, which has created a problem in the past because customers had difficulty easily finding what they wanted. But it’s now using artificial intelligence and machine learning to streamline the site and tailor it to specific customer needs. It also launched Scarcity Badges which alerts customers that there may not be many of certain items left, which boosted conversion rates.
- Building World-Class Marketing Capabilities. In 2017, Etsy discovered that about 88% of its visits came to Etsy.com from organic channels such as direct, SEO, email and push notifications. In 2018, it really worked to revamp its website and search capabilities to make it easier for customers to find what they’re looking for.
- Providing Best-In-Class Seller Tools and Services. In 2017, it held the site’s first ever Cyber Monday shopping day, which increased seller sales. It has begun gearing up for 2018’s holiday shopping season. It will test TV ads in select cities and is increasing its performance marketing spending by 40%.
Second-Quarter Strength for ETSY Stock
On Aug 6, Etsy reported its second-quarter results, which missed on the Zacks Consensus Estimate by a penny, reporting 3 cents versus the consensus of 4 cents. Revenue soared 30.2% to $132.4 million. The company raised full-year guidance again.
During the quarter, it also announced several new initiatives, including the controversial increase to the fee it charges merchants.
Additionally, it was rolling out subscription packages.
The fruits of both of those initiatives won’t be known until it reports third-quarter results. But in the second-quarter report, Etsy said that it wasn’t seeing a change in seller behavior due to the fee change.
Full-Year Estimates Come Down a Bit
The analysts have been overly bullish on Etsy all year as the company has been outperforming. But they have started to get a little more conservative, resulting in some cuts to the 2018 and 2019 estimates. The 2018 Zacks Consensus Estimate has fallen to 41 cents from 50 cents in the last 60 days. That’s still earnings growth of 8% since 2018 but it’s not as spectacular as presumed earlier in the year.
For 2019, the Zacks Consensus Estimate has fallen to 65 cents from 67 cents in the last two months. That’s earnings growth of 58.8%.
Earnings growth still looks healthy on the five-year chart.
Valuation Problem?
Etsy has always been a growth stock, even when it was down on its luck in 2016 and 2017. But the valuation has gotten stretched this year as the shares have soared. Expectations are sky high.
The stock now trades with a forward P/E of 117 and the “easy” money has been made. Not surprisingly, shares took a breather over the summer from their red-hot rally.
I would expect the shares to tread water until the next earnings report, which is expected out in early November. By then, we’ll have our first look at how the initiatives are working and the plan for the holidays. If it’s good, the shares could get another bump. But, they already have a rich valuation.
If shares were to pull back, they would be more attractive.
Etsy is still in the beginning stages of its turnaround. The basic changes have been made but look for the company to continue to drive business through improvements to its website and service to both buyers and sellers.
Etsy is finally putting to rest the Amazon myth: that it destroys all of its competitors. The marketplace for creatives is alive and well and thriving at Etsy.
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.
