Falling Etsy Stock Is Still Trading Above Its Fair Value

  • Etsy stock price is down 79% from its IPO listing price.
  • With continuing downward momentum, investors may want to wait a little longer to jump into this one.
  • I believe Etsy is still selling at approximately 7% higher than its fair equity value.

Etsy (NASDAQ:ETSY) has left investors with some pretty bad scars. Etsy stock was priced at $16 per share during their IPO back in April, but opened for trading at $31 per share, taking their valuation to an incredibly inflated $3 billion. Since then, the Etsy stock price is down to $6.36 per share; a 79% drop from its opening price. This huge drop in value has investors wondering if this falling knife can rebound from here.

ETSY stock chart

Source: ETSY stock price chart by amigobulls.com

To me, Etsy doesn’t seem to be trading at a discount, but rather closer to its intrinsic value. When Etsy stock first hit the market, the speculation was based on the company’s future growth. Since then, Etsy has been posting solid top-line growth but has neglected to give investors confidence regarding their ability to turn in a positive cash flow as their operating margin has been inconsistent. The only aspect of Etsy that should give investors some confidence lies in their balance sheet. They have a book value of $323 million, which means the company is only trading a little more than 2X the book value. And their liquidity is simply phenomenal. Not only does the company lack long-term debt, but their cash and cash equivalents are greater than all of their liabilities. So not only does Etsy have to worry about meeting working capital needs and debt obligations, but they can continue to pump more money into their operating expenses and capital expenditures to fund their future growth without having to worry about running out of cash in the short-term.

Etsy Valuation

Valuing the company using the DCF approach, and using a discount rate of 12% and terminal growth rate of 6%, the output is as follows.

etsy-dcfpic

As you can see, I feel comfortable with the fair value of equity at $664 million, which is still approximately 7% less than the company’s current market capitalization. This projection assumes that Etsy will experience double digit growth over the next 10 years. However, it also assumes that free cash flow won’t start coming in until 2021. Top-line growth estimates can be easily deterred due to increased competition by Amazon (NASDAQ:AMZN) or newer companies. Increased competition can also effect Etsy’s operating costs in order to remain competitive and therefore impact their bottom-line as well. A young company like this makes it very difficult to project 10 years out, however, I would keep a close eye on whether Etsy will be able to continue at their current growth rate and how long it takes them to begin producing strong cash flows.

Conclusion

From a value prospective, Etsy is getting closer to where their stock price belongs. Investors have been burned pretty badly by this stock. However, if you can overlook the volatility, the company carries along a very healthy balance sheet. While this doesn’t give us any insight as to the future of the company, it does tell us that they are certainly not strapped for cash. The question at hand is how Etsy will stand up to future competition and how much it will eat into their growth and/or margins. With the current market cap trading at a few percentage points above where I feel their intrinsic value is, I’d wait for Etsy stock to drop 10-15% more so investors can get both a value and growth investment out of this one.

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Comments on this article and ETSY stock

user profile picture
jacksonmayhew219
bearish
Etsy makes the bulk of its money from the people who SELL, not the people who BUY. That is important to know. The fees the sellers pay make up the overwhelming majority of Etsy's profits.

Now, when you consider how many of those people are selling items that legally violate the copyright, well, it doesn't take Warren Buffet to see that this is a bad investment.
1 1 reply
user profile picture
danwat1234
neutral
Oh, but what about EBIO??? Next week will grow a lot more?
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Do share this awesome post