Increasing Losses Make Etsy Stock A Highly Risky Investment

  • After an extended period of disappointing results and declining stock price, Etsy reassured investors with three-year growth targets.
  • However, Etsy reported declining figures for revenues, GMS, and adj. EBITDA growth, which continued the deceleration from earlier quarters.
  • The significant increase in net loss and weak growth drivers should alert investors.

The arts and crafts marketplace Etsy (NASDAQ:ETSY) reported its fourth quarter and fiscal year 2015 financial results this week in the midst of a temporary recovery in Etsy stock price, after the sharp plunge of 77% since the company went public in 2015. Etsy went public in April 2015 and attracted a lot of attention as a long-awaited unicorn IPO, which many expected to outperform following their unique platform and the incredible growth in revenue.

Etsy had a very challenging year in 2015, and the company reported disappointing results throughout 2015 that missed analysts’ consensus and raised investor concerns about whether the company could keep growing its gross merchandise sold (‘GMS’) and top line. Earlier this year, Etsy warned investors of a growth rate deceleration, increasing F/X impact, and higher marketing spending than previously expected. Together with the weak financial results, investors were not fond of the stock that traded at around 50% its IPO price. The consistent plunge in its stock price, supported by terrible financials, was somewhat halted at the beginning of this month. The price, together with most of the tech stocks, started to slowly rise from that point on.

ETSY stock chart

Source: Etsy stock price chart by

It has been a disappointing period since the IPO as Etsy failed to meet investors’ unrealistic expectations for growth. On this ground, Q4 earnings results were a significant surprise. The company reported a record high GMS of $791M and quarterly revenues of $88M, which reflected a 21% and 35% YoY growth, respectively. As shown in the chart below, these figures continue the trend of declining growth rates that Etsy is in as the company becomes more mature and stable.

Etsy_chart 10_022416

The disappointing results, growth slowdown, and increased competition from Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) raised investors’ concerns about whether Etsy had lost its mojo. They feared that what was an ultra-growth, promising company just a year ago, had become another mediocre e-commerce player. However, in the recent earnings release, Etsy provided, for the first time, 3-year targets for revenue growth, GMS, gross margin and adjusted EBITDA margin, which reflects a slower decline than expected, as shown in the table below.

2016-2018 CAGR Range 2016 Guidance
GMS Growth 13-17% Mid-point of range
Revenue Growth 20-25% High end of the range
Gross Margin Mid 60s (%) 64-65%
Adjusted EBITDA Margin High teens (%) 10-11%

Etsy plans to reach these targets by growing its international GMS (in constant currency terms), increasing mobile monetization, and higher contribution from new product launches and seller services. The fact that Etsy has committed to 3-year growth targets should reassure investors and reduce tension about the company’s growth potential. Furthermore, the new targets reflect not only the fundamental commitment that the company has to keep growing but that the deceleration in growth will be slower than many expected. The market reacted very positively to Etsy’s results and the new 3-year targets with a 13% surge in Etsy stock price in the after-hours trading session following the earnings release.

Even though the market is very pleased with the 3-year targets and 2016 guidance, I still believe Etsy stock is a risky play for now. The company has narrow revenue streams and is struggling with international and mobile monetization. The expected launch of localized versions of Etsy could boost global growth, and additional R&D efforts could increase mobile monetization. These initiatives will not trigger significant growth, and they might be coupled with higher R&D and marketing expenses that would worsen the company’s net loss beyond the massive 250% YoY increase in net loss in 2015. Increasing the negative bottom line significantly, with no expectations of breaking even, should raise red flags that convince investors to wait before leaping into a declining company. Before putting my money into Etsy, I prefer to see what Etsy’s next moves will be – will it launch new e-commerce services? Will it launch a non-core business? How will it continue to grow with limited revenue streams? How will it use the $270M in cash it has? For now, investors should add Etsy stock to their watchlists and witness how the growth plans materialize before making any investment decisions.

Lior Ronen Lior Ronen   on Amigobulls :
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Comments on this article and ETSY stock

Informative report, Lior. Thank you. May 18th untold thousands of Etsy micro-merchants will have their shops shut down by Etsy in a single day, which means products off the market. As Etsy makes its money from selling services to sellers, whether their handmade or other goods sell or not, it should be interesting to see what this does to their bottom line. One wants to get in on a good stock when it takes a temporary market dip, but will these further scare off investors?
Do share this awesome post