Etsy (ETSY) Drifts Lower On An Analyst Downgrade; We See Reasons To Like Etsy For The Long Term

Etsy (ETSY) is drifting lower today after snagging a downgrade from Needham to “Hold” from “Buy,” citing that shares will remain under pressure going forward despite already tumbling over 60% YTD.

We think Etsy is facing heightened volatility over the near term for a few reasons. After benefiting massively during the pandemic when mobility was limited, Etsy is now seeing a return to normalized activity, including an uptick in spending on experiences, causing less time for at-home shopping. Etsy is also witnessing softer demand related to broader macroeconomic challenges, including inflation. This started materializing in February and worsened in March and April, evidenced by unusual volatility in the company’s weekly gross merchandise sales (GMS) volume. Fabric and craft retailer JOANN (JOAN) is enduring a similar scenario, stating earlier this month that since around March, it has seen a significant drop-off in traffic and believes the US entering a recession soon is highly probable.

Despite this uneasy backdrop, there are reasons to be optimistic that Etsy is still poised for upside over the long term.

Etsy’s downside revenue guidance of $540-590 mln for Q2 and GMS forecast of $2.9-3.2 bln was a major factor in spurring a sell-the-news reaction in early May. However, an essential item indicating that Etsy is building on a much firmer foundation in the post-pandemic environment may have been overlooked. The company’s Q2 GMS outlook implies a decline of only low-to-high single digits yr/yr, representing retention of over 90% of the gains it has made over the last two years.

Furthermore, Etsy is lapping difficult comparisons in Q2 from the year-ago period when the company benefited from economic stimulus payments. As such, it expects GMS rates to grow in the second half of 2022.

Even though the pandemic-fueled tailwinds have mostly disappeared, they have provided a lasting benefit for Etsy, illuminated by its strong GMS and active buyer retention rates. We think shares plummeting over 60% on the year, pushing Etsy down toward May 2020 levels, acts as a solid buying opportunity for buy-and-hold investors. The short-run may be filled with elevated volatility, but Etsy’s longer-term future is shaping up to be quite attractive.