Etsy Inc (NASDAQ:ETSY) stock plummeted by more than 20% on Wednesday on the heels of the company’s maiden earnings report as a publicly traded company.
Brooklyn-based Etsy, which sells handcrafted items via its “local” online marketplace, was punished for its wider loss and revenue shortfall reported Tuesday night. Including today’s meltdown, Etsy is off some 45% since its first day of trading in April, and now trading right around its IPO price of $16 per share.
Those are the kinds of numbers that don’t exactly inspire confidence in a company, but those willing to take a risk might be very well rewarded by speculating in ETSY stock.
Etsy earnings didn’t wow anybody. The company experienced a steeper loss of $36.6 million, or 84 cents a share, versus a half-million loss in the year-ago period. Revenue of $58.5 million was 44% better year-over-year, but still missed the consensus estimate by a hair.
Still, this wider loss and the minor revenue blip aren’t game-changers. Yes, it’s fair to be skittish about Etsy stock considering it’s a recent IPO with some hurdles yet to overcome — not the least of which include a falling stock price, a strong dollar and no profits.
But right now, investors are staring at a massive discount in ETSY stock, and thus it’s worth looking at the company’s various risks to see how real they are, and whether the potential reward outweighs them:
Risk No. 1: Etsy Isn’t Profitable
Amazon.com, Inc. (NASDAQ:AMZN) hasn’t been able to consistently turn profits for years, yet its stock is up about 36% this year alone. That’s not to say Etsy shouldn’t strive for profitability or that it won’t get there. The problem has been expenses, which remain too high. Still, it’s important to note that capex is going toward expansion including growing the local communities and mobile initiatives — necessary moves to grow the business. There will be growing pains along the way, but this is a necessary step in the company’s early growth ramp.
Risk No. 2: Strong U.S. Dollar
The strong U.S. dollar has impacted Etsy in a negative way by tamping down international sales figures. Of course, that’s an issue that’s far from exclusive to Etsy — the Q1 earnings season has been chock full of companies crying “greenback!” on earnings misses. However, it’s an economic environment that won’t last indefinitely — and that rising tide will lift all boats, including Etsy’s.
Risk No. 3: Stock Performance
Etsy’s momentum clearly is downward-facing in nature; the stock has been on a fairly steady decline since coming public in April. However, this is a pretty common occurrence for IPOs — the deal itself bubbles up on hype, but the air is let out of the balloon as Wall Street starts to understand more about the company’s business and finds a more “normal” valuation for shares.
Moreover, Etsy said part of its wider loss came from changes to its corporate structure — that screams of growing pains, and certainly not something investors should expect to pop up every quarter.
On a personal note, I had a pleasant experience as a buyer on Etsy over the holidays. The seller, who was located overseas, left me a handwritten note with my handpainted purchase and included a second item for free.
You might argue that if the company ever wants to become profitable and if Etsy stock has a chance, sellers shouldn’t be giving away merchandise. But the next time I want to purchase a unique handcrafted item, guess where I’ll be going? Etsy!
Look, the marketplace may not be your style, but Etsy has brought something unique to e-commerce that seems to be resonating with lots of other folks. You can see that in its still rapidly expanding sales.
If you’ve got patience enough for Etsy to continue building up its customer base and for the global economy to tilt in its favor, the time to buy Etsy stock is now.
As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.
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