Etsy Bolts Upward; Should You Buy This IPO?

As expected, Etsy, Inc. (NASDAQ:ETSY) — which operates an e-commerce platform for handmade crafts — pulled off a red-hot IPO. The company priced 16.7 million shares at $16, which was at the top of the $14 to $16 range. And so far in today’s trading, the stock is up a sizzling 118%.

etsy-185The lead underwriters on the deal included  Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS).

The roots of Etsy go back to the summer of 2005 when Rob Kalin browsed the web for places to sell his handmade wooden computers — but he quickly realized there wasn’t one!

So perhaps he should build his own?  Well, of course, he did so — and demand was strong from the start.

As of now, Etsy has about 54 million members, which include 1.4 million active sellers and 19.8 million active buyers. The financials have also been strong — last year revenues jumped by 56.4% to $195.6 million (the company makes money from a combination of transaction and listing fees from sellers).

It’s true that Etsy continues to lose money. In 2014, the net loss came to about $15.2 million. But of course, this does not seem to be much of a concern for investors in the Etsy IPO. Then again, it probably helps that the company has continued to generate strong adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), which came to $23.1 million in 2014.

But there are some other key advantages that should be encouraging for buyers of the Etsy IPO. For example, the company has a powerful global brand and a loyal community of users. The technology is also top-notch, with a high degree of personalization features.

Yet perhaps the biggest advantage for Etsy is that the products are fairly unique, which generally come from talented artists and designers. There is also a focus on values like sustainability, social impact and concerns for the environment. No doubt, such an approach has been powerful for companies like Whole Foods Market, Inc. (NASDAQ:WFM) and Starbucks Corporation (NASDAQ:SBUX).

Despite all this, the Etsy IPO does provide some nagging issues. First of all, it is tough to get a sense of the market opportunity as the S-1 is vague on this point. The market could prove to be a niche — after all, about 86% of its sellers in the U.S. are women — and it is far from clear how many people really want handcrafted products.

At the same time, the valuation on Etsy stock is far from cheap. Consider that it is currently trading at a nose-bleed 18 times sales. That’s still in range with other online marketplaces — Alibaba Group Holding Ltd (NYSE:BABA) is trading at the same multiple.

Given all this, does it make sense to buy ETSY stock? For the most part, hot IPOs generally lose momentum quickly. And yes, this happened with BABA as well, which is down about 10% since its offering in September.

In other words, if you are considering ETSY stock, it’s probably best to wait for the stock to settle in.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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