Online homemade goods retailer Etsy (NASDAQ:ETSY) is set to report first-quarter earnings after the bell on Wednesday, May 6. While those numbers should be quite good, investors should be cautious with ETSY stock ahead of earnings.
Why? Because Etsy stock is already priced for perfect.
Yes, Etsy will deliver both blockbuster first-quarter numbers and a strong second-quarter guide amid a rapid shift from offline to online retail thanks to the novel coronavirus. But, ETSY stock is up almost 80% over the past month. It’s also near all-time highs amid a global economic shutdown. And the stock is trading at 100 times forward earnings, its biggest forward multiple on record.
In other words, ETSY stock already reflects perfect first-quarter numbers. Those numbers might not be perfect enough to justify the perfect valuation.
Big picture: I’ve loved ETSY stock through the highs and lows of 2020, but with shares up 50% year-to-date and at all-time highs ahead of earnings, I think it’s time to do some profit taking.
Etsy Earnings Will Be Good
Data suggests that Etsy’s first-quarter earnings report will be very good.
Etsy updated investors in early April on a conference call in which management said that 40%-plus volume growth in January and February slowed to negative volume growth in March. Since then, data suggests that Etsy’s growth trends have meaningfully recovered.
Google Trends data suggests that search interest related to Etsy has spiked throughout April to all-time highs, after dipping in March. Meanwhile, App Annie data shows that app download volume of Etsy similarly dipped in March before surging to new highs in April.
This data essentially tells the story of a consumer who went from being deathly afraid of Covid-19 in early March and not spending any money, to a consumer who has adjusted to this reality and is shopping online.
Etsy’s first-quarter earnings report will reflect this.
Etsy Already Reflects Perfection
The problem with ETSY stock is that it’s already priced for a really good earnings report.
Up 75% over the past month. Up 50% year-to-date. Trading a stones throw away from all-time highs, while the global economy is shut down. Trading at 100 times forward earnings, a record-high forward valuation.
ETSY stock is both overvalued and overbought ahead of the first-quarter earnings report. Thus, the only way this stock goes higher — or even maintains its current level — is if the print is flawless.
Flawless prints rarely happen. They are especially unlikely to happen against the backdrop of a pandemic. It’s quite likely that management issues a guide which integrates more Covid-19 uncertainty than expected. It’s also quite likely that the company struggled with margins in the quarter, and that such struggles will persist for the balance of the year.
If either or both of those things happen, earnings could turn into a “look out below” situation for Etsy stock.
Bottom Line on ETSY Stock
I’ve been bullish on ETSY stock all year long. But the best of this rally has already happened. Up 50% year-to-date, ETSY stock is now both overvalued and overbought. Sure, first-quarter earnings will be very good. But they likely won’t be enough to justify today’s extended valuation.
As such, now is the time to take profits on ETSY stock. There’s no shame in pocketing 50% gains in four months in the midst of a pandemic.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
