Etsy Drops After Reality Check on Long-Term Growth Outlook

  • First reported quarterly profit doesn't erase future concerns
  • Company needs to add sellers to revive prospects, analysts say

Etsy Inc., the online marketplace known for unique and quirky items, dropped the most in almost four months as the initial boost from recent strong earnings wore off and a negative long-term outlook concerned investors.

Brooklyn, New York-based Etsy soared after posting Tuesday its first quarterly profit since becoming a public company. But that wasn’t enough to sustain the shares. Analysts said decelerating growth and lingering questions about the company’s long-term strategy triggered a 7.8 percent decline in the stock on Friday, the biggest single-day fall since Jan. 11, to $8.27 at the close in New York.

“The valuation at $8 dollars makes a lot more sense than at $9 or above,” said Gil Luria, an analyst at Wedbush Securities Inc., who rates the company a hold. “Going into the quarter, a lot of people thought Etsy was going to zero.”

Etsy reported first-quarter revenue and profit that beat analysts’ estimates, in the face of scrutiny on slowing growth in gross merchandise sales and the number of active sellers and buyers.

‘Corporate Website’

First-quarter sales likely got a boost from “one-time benefits” such as Etsy’s requirement that sellers use its direct-checkout payments system, which will wear off as the year progresses, Luria said. The company is also reducing spending on marketing, which could be an additional drag on growth, he said.

Etsy’s gross merchandise sales growth is slipping. The key metric grew 18 percent to $629.9 million in the quarter from a year earlier, while it grew 21 percent year-to-year in the fourth quarter of 2015. Gross merchandise sales growth will stabilize in the next three years and the company will look to other services to increase revenue, Chief Financial Officer Kristina Salen said on a conference call discussing the results.

“Etsy’s biggest problem is that their growth is decelerating very quickly -- they are not adding sellers any more,” Luria said. “A lot of their sellers have left.”

The company used to be a community where handmade goods were sold in limited quantities, but it has become a “corporate website” where sellers buy products from other online marketplaces and sell them on Etsy, Luria said.

More than half of Etsy sellers use other channels as well, Chief Executive Officer Chad Dickerson said on the conference call, though Etsy remains their largest source of sales. The company over the last few years has been building out its seller services -- such as direct checkout and promoted listings -- as a new revenue stream.

Still, analysts remained unconvinced, even as Etsy maintained its full-year and three-year forecasts. Only one of nine analysts surveyed by Bloomberg rates the company a buy.

“A lot of the initial boost was probably more of a short squeeze rather than new buyers stepping in,” said James Cakmak, an analyst at Monness Crespi Hardt & Co., who rates Etsy as a hold. “The quarter was good, but they maintained their outlook -- they didn’t raise it. Their answers to why their weren’t raising the guidance didn’t leave much confidence.”

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