Will Etsy Stock Bounce Back?

After losing steam following a huge share price run a few years ago, Etsy stock may be on the verge of a comeback this year following structural changes and share buybacks. 

Online retailer Etsy, Inc. (NASDAQ:ETSY) operates as a marketplace for unique goods, connecting artisans and entrepreneurs with various consumers. With its objective to “Keep Commerce Human,” the company’s marketplace offers arts and other collectibles, craft supplies, accessories, and other “vintage treasures.” As a result, Etsy enjoys prominence in a niche corner of the online market.

Between 2020 and 2021, Etsy’s shares gained almost 300%. However, since the economy started returning to normal, the share price has witnessed a rapid decline. Since 2021, it has lost approximately 60% of its value, while it is down more than 40% over the past year.

What Caused the Rally in Etsy Shares?

When social distancing became a thing and many across the globe were quarantined in their homes, people turned to Etsy to make money from home.

Etsy capitalized on this demand by actively mobilizing its sellers to create and offer face masks. In April 2020, the company reportedly sold more than 12 million masks, generating $133 million in Gross Merchandise Sales (GMS), which is the dollar value of all items sold, accounting for 17% of its marketplace’s total GMS.

With a 76.7% year-over-year rise in active buyers, compared to a modest 17.5% growth in the prior year, the company’s GMS more than doubled from $4.97 billion in 2019 to $10.28 billion in 2020.

Etsy’s Growth Came to a Standstill

In 2021, the company’s growth showed signs of tapering. Active buyers grew by only 17.6%, while GMS increased 31.2% from the prior year to $13.49 billion.

This could be attributed to the decline in mask sales but the company’s stock was still flying high, reaching close to the $300 mark in November.

The real problems started in 2022, with harsh macroeconomic conditions such as high inflation and the Federal Reserve’s multiple interest rate hikes affecting consumers.

Etsy also faced economic reopening headwinds. With a 1.3% year-over-year decline in active buyers, its GMS also declined 1.3% from the prior year to $13.32 billion.

In addition, active seller numbers also experienced a marginal decline, perhaps the result of an increase in seller transaction fees from 5% to 6.5%.

How Is Etsy Performing?

Last year, Etsy’s performance was lukewarm. Once again, its GMS declined 1.2% from the prior year to $13.16 billion. On the other hand, the company maintained 2020-21 era gains somewhat, as its GMS was 98% of the prior-year value and 145% up from 2019 due to improving customer experiences.

Etsy is addressing headwinds, including its soft GMS trends, with a restructuring plan to reduce costs. The plan was approved by the company’s Board of Directors late last year and will cut the Etsy marketplace workforce by 11%.

The fourth quarter was conducive to the company’s growth trajectory, posting a record-breaking revenue of $842.32 million as Etsy ads and payment contributions grew. It is also notable that the raised seller fee does not seem to affect seller growth any longer, with active sellers increasing 21% in 2023.

As a testament to its efficient operating structure, shareholder capital return represented 90% of Etsy’s free cash flow in 2023. This shift in capital return strategy was aimed at protecting the stock’s valuation from falling below too far below fair value during times of volatility. In Q4, the company repurchased 1,347,993 shares of its common stock for approximately $93 million.

Simultaneously, the recent launch of Etsy’s AI-powered assistant “Gift Mode” to help customers find presents carries the ambition of becoming the gifting destination and raking in a higher market share.

The company expects Q1 2024 to be a low point regarding yearly growth in GMS and revenue. This year, revenue growth is expected to outpace growth in GMS, as has been the trend for a long time. Its adjusted EBITDA margin is forecasted to remain the same as 2023 (27.4%).

Will Etsy Stock Bounce Back?

According to 30 analysts, Etsy stock is likely to bounce back to $83.91 per share, a 22.6% increase from present levels.

A 5-year discounted cash flow analysis forecasts a share price of $86 per share, suggesting upside of around 25.1%.

Will these upsides be realized? The reality is that the unusual circumstances of rising face mask sales and rapid growth in e-commerce pushed Etsy on the path of significant growth. However, it was not to last, and the company is now trying to gain back its lost ground. The restructuring measures and share buybacks might help the company partially recover its share price, which is trading quite close to its 52-week low of $58.20 per share.

However, ETSY share price shows little signs of popping back to old highs in the near-term, even though the highest analyst rating forecast is for $140 per share.

To top the $200 mark once again, it would need an upside of more than 190% from the current level. So, although the stock can experience some upsides in the near term, a full turnaround to levels seen a few years ago looks highly unlikely.

Moreover, in 2019, Etsy implemented a long-term “Right to Win” strategy to bolster its growing addressable market. The strategy expected annual GMS to grow between 16% and 20%. However, its GMS performance over the past two years did not align with this expectation. The bottom line is it might be wise to watch the stock closely before taking the next steps and dipping a toe in the water.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.