Since the beginning of 2019, the e-commerce website Etsy (NASDAQ:ETSY) was on a slow slide from its high of just over $70. Then the novel coronavirus forced millions of Americans inside and ETSY stock has climbed over 280%.
Etsy is an online marketplace that specializes in handmade or vintage items and craft supplies. A 2019 survey by Faire reported that 37% of U.S. women that identified as millennials preferred receiving handmade gifts over mass-produced items. And 65% of all millennial shoppers said they preferred to do their holiday shopping from independent retailers instead of big retailers. That would seem to support Etsy’s growth.
However, back in May, Luke Lango wrote an article advising investors that it might be time to take profits before Etsy’s earnings report. By the looks of Etsy’s stock chart, investors ignored Lango’s advice. And they were rewarded. ETSY stock is up nearly 80% since May 1.
Lango made the case that Etsy was priced for perfection in May. That was when shares were up just 50% for the year. ETSY shares are just a bit more than that right now. In fact, Etsy has a price-earnings ratio of over 180 times earnings. And that’s why I feel investors would do well to take a close look at their investment before the company reports in August.
Investors Can’t Mask Their Optimism
Etsy put up solid numbers in their first-quarter earnings report. The company missed on earnings but scored a beat on revenue. The company suffered, by their own description, “significant headwinds” during the month of March, so the results weren’t unexpected.
However, what undoubtedly has investors excited was the report that Etsy gave about April sales of face masks. The company’s network of sellers sold over 12 million face masks in April. And I imagine that the company has continued to enjoy strong sales of these items in May and June.
Here would be my concern if I were an investor. I had multiple friends post information about their mother, grandmother, spouse, and others that were making homemade masks as a side hustle. To be fair, some of them may have also been selling their homemade masks on Etsy. However, it leads me to believe that handmade goods aren’t an easily defendable niche.
The Company Knows That They Have Work to Do
On their most recent earnings call, Etsy’s chief executive officer (CEO) Josh Silverman had this to say about Etsy’s sales of face masks:
So why am I going into so much detail about masks, it’s not because I’m convinced that masks are going to be an enduring category for months to come. They may not be nor are we convinced that this new cohort of buyers is going to be with us for months and years to come in a highly active way. We’re going to work really hard to try to earn their loyalty and we’ll have to learn and see what their behavior is over time.
Most of the time, what company management says on its earnings call is carefully calibrated. But every now and again, you get a nugget like this. I’m not critical of the statement. In fact, I appreciate the honesty. But it’s that honesty that should make investors consider if Etsy is worth its lofty price.
Etsy Stock Seems Like Chewy with a Smaller Market
Chewy (NYSE:CHWY) is another niche player that is carving out a successful model in the face of Amazon (NASDAQ:AMZN). In June, I expressed my opinion that Chewy needed more long-term confirmation of its pandemic-induced growth. This was being mindful of the fact that Americans may spend up to $99 billion on pet-related expenses in 2020.
Call me crazy, but I don’t believe Etsy has anywhere near that kind of addressable market. Etsy recorded just over $800 million in revenue in 2019. And the simple fact is that many of the sellers on Etsy are selling on other platforms as well as independently.
Is Chewy a perfect comp for Etsy? Of course not. But I’m looking at e-commerce companies that will benefit the most from consumers changing habits. And comparing Chewy with Etsy, my money’s on the pet supplies retailer every time.
It’s been a good run for ETSY stock, but now it’s time to step away and let Etsy prove me wrong.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
