Has Etsy (NASDAQ:ETSY) stock hit a wall? Shares rallied more than 167% over the past six months, no surprise there.
With the novel coronavirus serving as a major tailwind in the online marketplace, the stock’s epic surges during the pandemic make perfect sense. But after reporting blockbuster earnings earlier this month, prices have held steady around $135 per share. Is this a sign things are topping out?
Far from it. In fact, the pandemic tailwinds are just the start. The strong growth we’ve seen this year is set to continue. Expect Etsy to continue thriving into 2021.
It may seem that, as shares trade near all-time highs, the only direction ETSY stock can go is lower. Yet the growth train remains in motion, as there’s good reason for shares to keep on climbing higher.
Sure, valuation looks rich as well. Shares currently change hands at a forward price-to-earnings (P/E) ratio of 57.4. But when factoring in earnings growth, this will look like a minor concern in hindsight.
ETSY Stock Post-Covid
Plenty has been said about Etsy’s strong performance during the pandemic. So, why have shares stalled in recent days? As I wrote previously, chalk it up to standard “sell the news” behavior. In the months prior, investors kept hitting the “Buy” button on ETSY stock, anticipating blockbuster quarterly numbers.
And when said numbers hit the street? Blowout numbers, as expected. Sales soared 136.7% from the prior year’s quarter. Net income rocketed 429.1%. But it wasn’t just a massive rise in mask sales that drove the online marketplace’s strong numbers.
The “stay-at-home economy” has accelerated the pivot to e-commerce. Like what we’ve seen with Amazon (NASDAQ:AMZN) and Shopify (NYSE:SHOP), this already-strong e-commerce megatrend became even stronger due to the “new normal.”
But will these impressive results continue post-pandemic? It may seem like the ship’s already sailed for e-commerce plays like ETSY stock.
Yet that’s far from the case. Why? Sure, once we “return to normal,” sales growth may cool a bit. But don’t think for a second that the millions of new customers Etsy has added to its platform will disappear once the virus is in the rearview mirror.
That is to say, the company will hold onto much of the ground it’s gained during the pandemic. And, with this increased customer base, expect above-average growth to continue. With this in mind, there’s plenty more runway for ETSY stock.
Granted, investors know this full well. That’s why shares trade at such a rich multiple. But don’t let that dissuade you. When you factor in continued earnings growth, this isn’t much of a concern.
Don’t Split Hairs Over Valuation
As I said above, ETSY stock trades for well over 50 times forward earnings. Granted, that’s a premium multiple. But factoring in earnings growth, that’s a more-than-reasonable price to pay.
Analyst consensus calls for earnings of $2.35 per share in 2020, and $2.29 per share in 2021. But after this month’s blockbuster quarterly numbers, it’s safe to assume actual results could be far above these prior projections.
What do I mean? Earnings for the recent quarter were 82 cents per share. That’s 34 cents above what analysts were calling for. Next quarter’s estimates? Consensus calls for 65 cents in earnings for the quarter ending Oct. 31, 2020.
Yet with Etsy handily beating projections this quarter, chances are they’ll knock it out of the park again in the October quarter. Especially given that the pandemic continues to keep things in limbo. Sure, brick-and-mortar retail has started to reopen. But coronavirus cases remain high and social distancing dissuades outside activities, so expect e-commerce growth to remain strong through the fall.
In short, earnings for this year could be far above current projections. Whether that means earnings-per-share (EPS) of $3 or even $4 over the next year, remains to be seen. But given the epic growth going on right now, and the fact the company will retain much, if not all, of this recently-added customer base, shares today aren’t as pricey as they seem.
Buy ETSY Stock Now, While Shares Remain in Neutral
Post-earnings, the epic run in this stock has taken a breather. Many investors buying in at lower prices are cashing out, keeping shares stuck at today’s price levels.
Use this to your advantage. Given that the online marketplace will continue to thrive, as pandemic tailwinds accelerate the long-term shift to e-commerce, now’s the perfect time to enter a position in ETSY stock.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
