Etsy On Track To Beat Q4 2015 Consensus Earnings Estimates

  • According to ITG Research, Etsy Q4 sales are tracking well ahead of the Street estimates.
  • This might help Etsy top consensus estimates for the first time since going public earlier in the year.
  • Etsy's short interest has also declined by a huge margin since July.
  • The short-term outlook for Etsy stock appears good, but the suitability of Etsy stock for long-term investing remains in question due to Etsy's rapidly escalating losses.

Craft/vintage goods marketplace Etsy (NASDAQ:ETSY) has managed to earn itself the ignominious title as the worst-performing IPO in 2015. Etsy stock is 44% down from its IPO price. Among its myriad of problems include an extremely poor sentiment amongst the investing community as well as the fact that the company has failed to meet consensus earnings estimates for three quarters running.
ETSY stock chart

Source:Etsy Stock Price Data by amigobulls.com

Etsy Earnings Surprise History

Fiscal
Quarter End
Date
Reported
Earnings
Per Share
Consensus
EPS* Forecast
%
Surprise
Sep2015 11/03/2015 -0.06 -0.03 -100
Jun2015 08/04/2015 -0.08 -0.03 -166.67
Mar2015 05/19/2015 -0.12 0.03 -500

Source: Nasdaq

But Etsy (NASDAQ:ETSY) could finally break from that jinx during its upcoming fourth quarter earnings call. According to ITG Research, Etsy Q4 results are tracking well above analysts’ expectations, following an especially strong run in November. If the company does not falter during the remaining few weeks of the year, then Etsy could post its first earnings beat during the fourth quarter earnings call. The first earnings surprise in its history as a listed company will be a huge positive following the recent 3 consecutive misses.

This could provide a much-needed break for Etsy stock, which is poorly viewed amongst investment circles. During the third quarter, Etsy (NASDAQ:ETSY) posted revenue of $65.7 million, good for 37.9% Y/Y growth but $0.47 million short of analysts consensus estimates. Non-GAAP EPS of -$0.06 was $0.03 worse than estimates. Etsy reported Gross Merchandise sales of $568.8 million, 21.7% better than the previous year’s comparable quarter. Etsy finished the quarter with 1,533 active sellers, a 19.1% Y/Y improvement, as well as 22, 603 active buyers, a 24.9% Y/Y increase.

But the market continues to remain skeptical about Etsy’s ability to become a profitable business, especially now that Amazon has launched its Handmade site to compete directly with Etsy. Amazon launched Handmade Marketplace in early October,following the success of Etsy, and has already managed to garner about 200,000 listings on its site as compared to 36.5 million on the Etsy marketplace.

Etsy’s piling losses, however, are what have been fueling the bears. Whereas Etsy’s adjusted EBITDA increased a healthy 46.5%, 850-basis points better than top line growth, the company’s marketing expense increased 88%, which more than offset the growth in revenue. Etsy has been spending heavily on Google product listing ads, and this is likely to get even worse in the coming quarters as competition from Amazon’s Handmade Marketplace increases.

Meanwhile, Etsy's stock-based expenses jumped 62%. Young companies such as Etsy tend to be quite generous with stock-based executive compensation as they try to compete for top talent with more established players. In the case of Etsy, this line-item accounts for just 5.2% of revenue which is reasonable enough. But if it keeps expanding much faster than the top line, then it will continue to put a pressure on profit margins. In the final analysis, Etsy’s net loss during the first three quarters swelled by more than 400% to -$49.8 million. With this kind of a backdrop, it’s not hard to see why investors have been giving the shares a wide berth. An earnings surprise in the coming quarter is something Etsy needs desperately, when viewed in light of its increasing losses.

Takeaway

Although Etsy stock remains well-shorted, the shorts have gradually been taking profits which minimizes downside risk. Short interest in Etsy shares has been cut almost by half since mid-July when it was at its peak. Although the ITG report provides some relief for short-term shareholders, the long-term sustainability of Etsy’s business model remains in question due to its ballooning costs and widening losses. Add to that the launch of the Amazon handmade platform and Etsy's problems start to look worse. With these factors in the background, it looks extremely difficult to justify a long-term investment in Etsy stock. Hence, long term investors could be better off staying away from this one.

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  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and ETSY stock

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jacksonmayhew219
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Let's be honest here, the only reason Etsy makes any money is by looking the other way while people sell a TON of stuff that violates copyright laws. Don't believe me, search Etsy for things like "Disney", "Harry Potter", NFL logos, etc. The people selling that stuff do NOT have licenses to sell it. Etsy knows this and lets it happen, because it puts money in their pocket.
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