As the first half of 2022 ends, it has not been a fun year for most investors, except those who loaded up on energy stocks. If you bought a low-cost S&P 500 index ETF, you’re down more than 21% through the year's first six months.
How bad has it been?
Of the 506 stocks in the index, almost 400 are losing money, and 150 are down 20% or more. Netflix (NFLX) is the worst performer of the latter groupNFLX) is the worst performer, down more than 70% through June 30.
The second-worst performing stock is Etsy (ETSY), the operator of a two-sided online marketplace platform for buyers and sellers of one-of-kind products. It’s down 66% year-to-date.
It might not be a good time to buy stocks of any kind at the moment, but paraphrasing the immortal words of Warren Buffett, “Be greedy when others are fearful.”
Here’s why I like ETSY stock even though it’s down 76% from its 52-week high.
How Low Can Etsy Stock Go?
When you’re the second-worst performing stock in the S&P 500, it’s easy to call Etsy a falling knife. It’s also easy to say it’s not worth the paper its share certificates are written on.
However, I believe the company’s business model is far from broken. With a bit of patience and courage, buying ETSY stock at current prices will reap significant rewards in 18-24 months.
How so?
Etsy’s stock is down 8% in the past week due to analyst concerns about a softer economy and the dent it would put in Etsy’s revenue.
On June 27, Needham analyst Anna Andreeva downgraded Etsy from a “buy” rating to a “hold” on concerns of a potential recession. If discretionary spending gets cut dramatically, Etsy could be at the top of someone’s belt-tightening agenda.
The analyst believes that the company’s second-quarter results should be in-line with its guidance from early May. That called for gross merchandise sales (GMS) of $2.9 billion to $3.2 billion, revenue of $565 million at the midpoint of its guidance, and a 25% adjusted EBITDA margin.
It will likely get tripped up in the back half of the year. It assumed the economic environment in the third and fourth quarters would be similar to the first two. In hindsight, we know that’s not the case.
However, the company has yet to revise its guidance downward. It doesn’t report its Q2 2o22 results until early August, so that Etsy may do so in the next 2-3 weeks. That’s bound to knock its share price lower still.
It’s more than possible investors could get an entry point to buy EYSY stock in the low $6os by the end of summer. It hasn’t traded this low since April 2020.
The Reason for Optimism
Barron’s recently reported that Andreeva attributes its strong showing in the second quarter to discounting.
“The analyst notes that Etsy has been driving demand with discounting: There was a two-day 20%-off promotion last week, and a recent 30% discount offering to new buyers,” Barron’s contributor Eric Savitz wrote on June 27.
“She [Andreeva] is modeling a 3% decline in gross merchandise sales this year, with a 3% rebound in 2023, but says the Street consensus for next year calls for 15% growth, a view she believes is too upbeat.”
Another worry for Etsy shareholders is the growth slowdown in its active buyers. It had 95.1 million active buyers in the first quarter, 4.9% higher than a year earlier. However, compared to Q4 2021, they were 1280 basis points lower. Andreeva sees active buyers in 2022 falling 5% from 96.3 million in 2021.
So, there is no question that the second half of the year will provide Etsy with a greater challenge than initially expected. That’s business. Sometimes you win, and sometimes you lose.
Ultimately, though, it more than doubled its sellers from 2.6 million in Q1 2020 to 5.5 million in Q1 2022. It increased its buyers by more than 80%, from 47.1 million in Q1 2020 to 89.2 million in Q1 2022.
A little setback in active buyers shouldn’t change the long-term investment thesis for owning its stock.
Both buyers and sellers love its two-sided marketplace. As it continues to focus on growing its active buyers, frequency of buying, and average order value, its revenues and profits are bound to grow exponentially. Still, it would be unwise to think this would happen in a straight line higher.
The Future’s So Bright You Have to Wear Shades
None of the 22 analysts covering ETSY stock have a “sell” or “underweight” rating. Overall, the average rating is “overweight,” with an average target price of $130, 76% higher than where it’s currently trading.
Etsy’s price-to-sales ratio is 4.67, less than half its five-year average. Its multiple hasn’t been this low since 2016. It was a much smaller company back then and losing money. In 2021, it made $494 million on $2.33 billion in revenue. You can’t compare the two.
Even Andreeva likes Etsy’s long-term prospects.
“Longer term, we like Etsy’s unique business model that in the last few years has gone from a niche e-commerce marketplace to a top-of-mind shopping destination across numerous categories, demographics and geographies,” the analyst wrote, according to Barron’s.
In 18-24 months, aggressive investors will be thankful they took a chance and bought on the dip. However, keep some dry powder because it will likely drop more before heading back above $100.
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