Shares of online marketplace Etsy (NASDAQ:ETSY) — which specializes in handmade, vintage and craft supplies — slipped noticeably on Wednesday. The red ink follows Goldman Sachs downgrading ETSY stock due to concerns about consumer discretionary trends. While a worrisome prospect, investors should look at the broader context before making a final decision.
According to a Seeking Alpha report, Goldman analyst Alexandra Steiger downgraded ETSY stock to “neutral” after previously rating it a “buy.” Specifically, the expert warned that Wall Street estimates already fully price in Etsy’s growth potential in the years ahead. Based on lowered earnings expectations, Steiger cut the price target to $80 from the previous $84.
Interestingly, that wasn’t the only discretionary-retail-oriented enterprise that Steiger targeted. The analyst also hit Revolve Group (NYSE:RVLV) — which focuses on high-fashion online retail — with a “sell” rating due to a downcast view related to industry headwinds.
While both companies specialize in different areas, the theme strikes a familiar note: Steiger is concerned about tightening consumer discretionary spending trends. While data from Statista indicates that the global e-commerce market could reach a market volume of nearly $5.03 trillion by 2028 — representing a compound annual growth rate (CAGR) of 8.95% from 2024 — the consumer has been hit hard with multiple financial challenges.
ETSY Stock Faces Obstacles, but It’s Not Out of the Game
Indeed, Steiger has good reason to be concerned about the handcrafted goods retail specialist. In the past 52 weeks, ETSY stock dropped around 41% of equity value. As a brutal combination of stubbornly elevated inflation and simultaneously high borrowing costs hit the collective wallet, people’s spending habits naturally shifted.
According to data from the U.S. Bureau of Economic Analysis, the personal saving rate increased from 3.3% in November 2022 to 4.1% one year later. Also, in May of last year, the metric hit 5.3%, which makes sense. As interest rates rose, money effectively became more expensive. Thus, an incentive to save dollars — rather than spending them — materialized.
The impact can also be seen in the financials undergirding ETSY stock. In 2020 and 2021, Etsy posted revenue of $12.65 million and $15.88 million, respectively. That was when interest rates dropped to multi-year lows. And while borrowing costs spiked in 2022, Etsy managed to post $20.24 million in sales.
However, the headwinds caught up to the consumer last year, resulting in a trailing 12-month (through the third quarter) revenue haul of $19.92 million. So, it’s understandable why Steiger is bearish on ETSY stock.
Nevertheless, if the personal saving rate declines due to the Federal Reserve adopting an accommodative monetary policy, some of the discretionary spending sentiment could be directed to Etsy’s unique online marketplace.
Plus, the rise in short interest since August of last year, combined with major trading entities selling call options, sets up a tantalizing situation. Basically, if ETSY stock swings higher instead of lower, the panic to cover short positions could put shares into a positive feedback loop, benefiting bullish speculators.
Why It Matters
Currently, analysts rate ETSY stock a consensus moderate buy. This assessment breaks down as 12 buys, 10 holds and two sells. Overall, the average price target lands at $82.91, implying over 10% upside potential.
On the date of publication, Josh Enomoto 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.
