Aside from this year’s pedestrian results in the market, Etsy (NASDAQ:ETSY) still represents a tremendous success story. In the first half of 2016, Etsy stock was trading in high single-digit territory. Despite falling significantly from its peak price earlier this year, ETSY shares are still trading just above $45. No matter how you look at it, that is progress.
Furthermore, it’s progress that doesn’t quite make sense in this modern world. Specializing in an e-commerce platform for handmade arts and crafts, along with vintage items, ETSY is an anomaly. This is a world where smart devices from Apple (NASDAQ:AAPL) and its ilk dominate. It’s also a world where the most dominant e-commerce platform, Amazon (NASDAQ:AMZN), sells such products.
As a result, Etsy stock’s underlying business plies its trade in an extremely competitive retail sector, one that doesn’t intuitively cater to arts and crafts. Yet shares have exploded higher in the long-term charts. What gives?
Much of the enthusiasm for Etsy stock stems from millennial consumers’ penchant for “authentic” products. This generation — along with the younger Generation Z — arguably has a deeper sense of community than older ones. For instance, millennials would rather eschew big corporate brands for those that hail from small businesses.
It’s a trend that’s disrupting many top-tier labels. At the same time, it’s giving ETSY the fuel it needs to thrive in a not-necessarily favorable marketplace.
However, the volatility in Etsy stock this year cannot be ignored. Since March 1, shares have lost more than 38% of their value. Even more concerning, ETSY dipped sharply following its third-quarter 2019 earnings report, despite beating on per-share profitability and revenue.
Are the shares still a buy for 2020?
Etsy Stock in a Cool-Off Phase
Although Q3 2019 was a solid showing, one of the metrics that concerned investors was net income. It dipped more than 29% from the same year-ago quarter. That suggests management is burning off more resources to maintain its growth trek.
Still, almost every other metric appears to be pointing in the right direction. For instance, the number of active buyers on the platform continues to rise impressively. For example, the average year-over-year growth in 2018 was 17.4%. In 2019, the growth rate is on track for nearly 19%.
As well, the number of active sellers on ETSY’s platform is likewise gaining after going flat in the first half of 2018. The growth rate in sellers is averaging 16.2% In 2018, the average slipped to under 9%.
So, we have more buyers and more engagement. Why then did Etsy stock crater in 2019? The answer is that the ratio between buyers and sellers began to flatline.
At first, this answer also appears lacking. Back in Q4 2012, Etsy buyers outnumbered sellers by an 11:1 ratio. In the most recent quarter, this ratio jumped to over 18:1.
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However, the ratio peaked in Q4 2018, when there were 18.6 buyers for every one active seller. Then, from Q1 2019 through Q3 2019, this metric averaged 18.4 buyers per seller. In other words, the buyer-seller ratio went flat.
Consequently, as the markets digested this flatlining ratio, they exited out of Etsy stock. And they will likely continue to do so if the ratio worsens. Between Q2 2015 through Q3 2019, the correlation coefficient between Etsy stock and the buyer-seller ratio is 82%.
That means wherever the ratio goes, so too will the share price. Therefore, the upcoming Q4 result will be crucial.
How to Trade ETSY Stock
Because of the lag between market pricing and quarterly reports, it’s understandable why ETSY stock got ahead of itself, especially during the first calendar quarter of this year. But as management disclosed past fiscal data, Wall Street realized that Etsy was losing contextual momentum in buyer-seller engagements.
Interestingly, the buyer-seller ratio is starting to tick up since Q2 2019. Thus, Etsy stock could be declining ahead of itself this time around. Put differently, I believe ETSY is fairly valued right now. Typically, though, shares of any company don’t just reach equilibrium and stay. Rather, they overcorrect to extreme highs or lows before settling into equilibrium.
Ultimately, then, I like my chances longer term with Etsy stock at this present price point. However, bulls still risk suffering declines because of the aforementioned overcorrection tendencies. For conservative investors, they may want to wait until Q4 data posts. If the buyer-seller ratio improves, shares could go back on the upswing.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
