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Bear of the Day: Etsy, Inc. (ETSY)

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Etsy, Inc. (ETSY - Free Report) is an arts and craft fair-style e-commerce firm that soared during covid. The stock has tumbled alongside many other pandemic winners as growth normalizes.

Etsy is also trying to figure out how to stick to its niche roots while expanding into a larger digital commerce player to challenge industry giants.

The Etsy Basics

Etsy is an e-commerce marketplace that allows individuals and small businesses to sell everything from clothing and jewelry to art and home décor. The online retailer was founded in 2005 and went public in 2015. The Brooklyn-based company carved out a solid space within the booming industry by selling items consumers might not be able to find on Amazon (AMZN - Free Report) and eBay (EBAY - Free Report) .

Etsy also owns musical instrument marketplace Reverb, and it ramped up its growth bet over the last few years. This includes its $1.6 billion purchase of fashion resale app Depop that’s widely popular within the fast-growing resale space, especially with Gen Z. The company also last year purchased fellow online craft seller Elo7 which some have called the Brazilian Etsy.

Etsy makes money from every transaction, as well as advertising, paid search, and more. The firm faced backlash from some of its sellers earlier this year when it raised its transaction fee from around 5% to 6.5%. Etsy executives said that the higher fee—its first increase since 2018—is crucial to help it provide better seller support and expand its marketing efforts.

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Etsy closed the first quarter with roughly 5.5 million active sellers on its namesake website, with 7.7 million overall. The company also boasts around 95 million active buyers. Etsy averaged 33% revenue growth in its first five years as a public company. Then its sales skyrocketed 111% in 2020, driven by locked-down spending, face masks, and more.

Etsy followed that up with 35% revenue expansion in 2021. But the covid-boosted growth is over and its faces nearly impossible to compete against periods. Zacks estimates call for its 2022 revenue to climb 8.6% to $2.53 billion, with FY23 projected to pop 16% higher.

Wall Street is frustrated that Etsy’s adjusted earnings are projected to fall 41% YoY to $2.01 per share in 2021. And the company’s FY22 and FY23 consensus earnings estimates have dropped 8% and 9.5%, respectively since its first quarter release on the back of subdued guidance and other macro headwinds.

Bottom Line

Etsy’s downward earnings revisions help it land a Zacks Rank #5 (Strong Sell) right now. The stock sports “F” grades for Value and Momentum in our Style Scores system. Etsy’s balance sheet is also not as strong as some might hope for an e-commerce player and younger tech company, after taking on a large amount of debt in the past few years to fuel growth.

Etsy stock is still up nearly 500% in the past five years. But it’s down 23% in the last two years and 70% from its November 2021 peaks. Etsy could bounce back, but it might be best for investors to hold off on Etsy until the market shows some willingness to start buying these beaten-down tech stocks and former covid high-flyers.

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