The basic premise of my optimism in stocks comes from the new, post covid-19 pandemic habits that benefited certain sector stocks. Etsy (NYSE:ETSY) stock, for example, rallied 900% out of the 2020 crash. Investors chased the big increases in user metrics for all social media. The bullish thesis is valid and still in effect. It’s the investor expectations that went askew for the last two years.
When people were out of work, they had time to browse. Moreover, the entrepreneurial spirit kicked in. Etsy has that extra edge when it comes to both of these things.
Some people went to Etsy out of sheer necessity seeking alternative income sources. The massive disruption had a reset effect on everyone, and most of us drastically changed routines. Job functions also have changed forever, which should continue to benefit Etsy too.
However, Etsy stock has been in free fall since last November. From that high to the recent low it lost 65% of its value. And since Feb. 24, the bulls have been trying to make a stand. So far things look good, but the bears may not relent yet.
My message today is optimistic about holding it, but with caution from current external factors. Wall Street has to account for the risks from wars and a combative Federal Reserve. Yes, this week we found out that the Fed is indeed in panic mode. Fed Chair Jerome Powell’s message was that it is intent on fighting inflation. In hindsight, they were wrong about it being transitory.
Long term, I am confident that Etsy’s business will prosper. Short term, the Etsy bears are in control of the price action. Until we see evidence of the contrary, we must assume that rallies will face sellers. Those who were long the stock should have the courage to sit through the next few weeks. Not many experts are discussing it, but there’s still a chance Etsy stock could make new highs for the year. Goldman Sachs revised its S&P target lower, but it still expected 10% upside.
I don’t usually seek such notes from the experts, but it’s nice to see them somewhat in sync.
The Bullish Thesis Behind Etsy Stock Is Clear
Etsy’s financial metrics speak for themselves. The major hurdles that retail investors face are with perception. It’s easy to confuse the success of the company with the stock price action. It is hard for people to see one do well and the other fail. In this case, the stock price is acting as if the company is failing.
In reality, it’s quite the opposite.
Let’s look at the recent earnings report to see why. Etsy grew revenues almost three times since 2019. It even managed to grow 35% over pandemic sky-high comps. And thanks to the stock crash, Etsy is also now a bargain in absolute terms. Its price-to-sales ratio is 8x and its price-to-earnings ratio is under 40x. For a growth company those are close enough to be in line with giga-caps.
The simple message is that there is no bloat in this stock now. In fact, its net income last year was half a billion, which is 6.4 times bigger than 2018. Management is delivering results without squandering money.
Bottom Line on ETSY
Wall Street is too comfortable shorting smaller stocks like Etsy. The whole lot rallied too hard out of the pandemic, but I bet that this move will end badly. We may have seen it starting this week, but I won’t get too comfy yet until next week. Despite the very bearish message from the Fed, the indices rallied 6% in under two days. When prices don’t fall on bad news, then maybe they have hit rock bottom.
While the geopolitical risks are real, the macroeconomic conditions have not deteriorated. The reason for the Fed’s tightening cycle is because things are way too good. This is not a bearish scenario for stocks like Etsy. If things are too good, the Fed is not here to completely break them, but only slow them down.
Regardless, Etsy stock has already shed most of its fat. So there is not much left but strong fundamentals. In the long run, and if markets are higher, Etsy stock owners will do well. The demand for its services exploded from the pandemic, and that’s likely to linger. The habits we formed in the past two years are sticky. Even though some parts of our lives have gone back to normal, we’ve adopted new lasting routines.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.