Esty (NASDAQ:ETSY) has more than doubled since the beginning of the year. But I suspect that the ebullience that has pushed Etsy stock so high is now overdone.
A big reason for this is e-commerce sales have risen during the Covid-19 pandemic. This greatly benefits online retailers like Etsy. The shift in consumer online spending is now approaching about 20% of total sales. Most analysts believe this trend is here to stay.
For example, Seeking Alpha reports that aggregated Bank of America credit and debit card data show online sales have risen between 70% and 75%. But Etsy stock is up mainly because its revenue and earnings have significantly beat expectations. For example, last week Etsy reported that its Q2 revenue was $428.74 million, up 137% year-over-year.
More importantly, it beat expectations for revenue by a whopping $98.75 million, or by 30%. That means analysts and the market were way off in how much the public is moving to online sales.
Etsy’s earnings per share were more than twice as high as expectations. EPS came in at 75 cents vs. consensus expectations of 36 cents. Adjusted EBITDA was 78% higher at $156.6 million vs. expectations of $84.2 million.
A Closer Look at Etsy Stock
As a result, analysts polled by Yahoo! Finance now believe that revenue could exceed $1.46 billion this year, and $1.67 billion next year, up 78% and 14.4% respectively. Moreover, analysts forecast to rise to $2.33 up 47% next year after rising over 107% this year to an expected $1.58 per share.
So, in effect, they expect that sales and earnings growth will slow down next year. Here is the thing. Etsy stock won’t be doubling again if those expectations pan out.
As it stands, at $136.06 per share as of Aug. 7, Etsy has a $16.1 billion market capitalization, even though sales are expected to be $1.67 billion next year. That is about 9.5 times sales, a very high ratio.
Moreover, the price-to-earnings ratio for next year is still high at over 58 times earnings. In effect, the stock is priced for perfection. If sales and earnings keep on beating expectations, these high ratios might be justified. But watch out if the market tumbles and high multiples are no longer in fashion for internet e-commerce stocks.
By the way, my view is not popular on the Street. The company is a darling on Wall Street. According to Barron’s, analysts think that the rally in Etsy stock will continue. Now that the Q2 earnings came in so high above expectations, more analysts are upgrading their forecasts for the stock.
Recently the CFO told Barron’s that its “blockbuster” quarter was due to more than just the sales of masks. The CFO says Etsy’s success isn’t just due to the global pandemic. She argues that there are six other categories of sales that make up 75% of its total that are rising.
What to Do With The Stock
I still think it is hard to believe that line. Where will sales be in two years from now? Don’t forget that it trades for almost 10 times sales. It’s hard not to expect that much of the stock’s gains have already happened for a while.
My view is probably in the minority. I have not been able to find any other outspoken analyst who has been quoted as negative on this stock.
The problem with taking a position in a popular stock at a high multiple is that you very often get a chance to buy it cheaper. That is why I always recommend that new investors in a position take an average cost approach. Try to only add to your original position when you can lower your cost in the stock. This means being patient and having a long term view to your investment.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. He runs the Total Yield Value Guide which you can review here.
