Where will Etsy’s inventory be in 1 year?
Industries like streaming entertainment, digital payments and online shopping have been huge winners due to the coronavirus pandemic. Etsy (NASDAQ: ETSY), for example, has added a massive number of users to its platform, driving sales and profits to record highs. The stock rose 570% from the start of 2020 to its all-time high in November 2021.
But with this pandemic-generated surge behind us, consumer behavior in a period of normalization, and heightened macroeconomic uncertainty, Etsy’s stock has come under immense pressure. The popular ecommerce stock is down 24% in the past 12 months and down 64% from its peak. Where will Etsy’s inventory be in a year?
Etsy is experiencing a slowdown
In 2022, Etsy’s revenue grew 10.2% to $2.6 billion. This marked a sharp deceleration from its growth rates of 110.9% and 35% in 2020 and 2021, respectively. And management’s decision to increase fees charged to sellers bolstered the 2022 figure. Gross merchandise sales at Etsy last year fell 1.3% to $13.3 billion, signaling a noticeable flattening of interest in the online market.
Even more alarming is the fact that Etsy’s user base shrank over the year. As of December 31, the company had 7.5 million active sellers and 95.1 million active buyers on its platform, both down about 1% year-over-year. To Etsy’s credit, however, its user base grew slightly from the third quarter. Whether the main issues are macroeconomic factors or difficult year-over-year comparisons (or both), Etsy faces a different environment now than it did in 2020 and 2021.
For the first quarter, management expects revenue of $600 million to $640 million, representing a respectable jump of 7.1% year over year (at the midpoint). The management team called a shift in consumer spending as the reason they are tempering their expectations for the rest of this year. Wall Street expects sales to rise 8.1% in 2023.
Proceed with caution
Even with Etsy’s stock price dropping 23% over the past year, it’s still trading at an advanced price. price/earnings ratio (P/E) of 28. While that’s significantly below the stock’s three- and five-year averages on this metric, it’s still more expensive than e-commerce peers eBaywhich trades at a forward price-to-earnings ratio of just 10. Etsy is also priced at a premium to heavy tech Nasdaq 100 hint.
The macroeconomic picture couldn’t be more hazy at this point. Inflation may be down from its 2022 peak, but it remains elevated, reducing the discretionary income consumers can spend on the types of products Etsy specializes in. And even in the face of troubling banking problems, the Federal Reserve still raised interest rates again at its meeting on Wednesday. It’s hard to predict what will happen to the economy for the rest of the year, but a recession could well be on the horizon.
How, then, should investors think about Etsy’s business and actions with this perspective in mind? I believe the best approach at this time is to be cautious. The company’s outlook for 2023 shows a dramatic slowdown from the gains Etsy was making in previous years — numbers that shareholders have fallen in love with. Worse still, there are growing signs that the economic situation will remain difficult in the short term.
However, for investors who can look past these issues, Etsy may look like a attractive stocks to own long-term. It is a competitively advantageous and profitable business that provides a differentiated merchandise offering to its customers. Additionally, U.S. e-commerce spending as a share of overall retail spending remains relatively low, giving Etsy a potentially long growth streak. Riding a larger secular trend can do wonders for any business.
All this to say that 2023 could prove to be another tough year for the stock and the company from an operational standpoint. But when the economy stabilizes and consumer confidence is stronger, it’s possible that Etsy’s stock will approach its former highs again.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool holds jobs and recommends Etsy. The Motley Fool recommends eBay and recommends the following options: Short Calls April 2023 at $52.50 on eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.