New Trade for February 10th, 2022

Stocks ticked higher in early trading ahead of Q4 results from Coca-Cola (KO), Expedia (EXPE), and Affirm (AFRM). Upbeat corporate earnings helped lift the market higher for the second day in a row yesterday, as tech recovered some of the losses from the January sell-off.  

“The market seems to have found a more constructive tone in the tug of war between trepidation over the Fed and the better fundamentals that we’ve seen in both earnings and the economic data,” said Art Hogan, chief marketing strategist at National Securities.  “Having Disney do better than Netflix after its earnings report certainly seems to be positive.”

Our trade alert for today focuses on a ticker that analysts are sounding the Buy alarm for.  After an epic run to a sky-high valuation, the stock price has cooled down to a more attractive entry-level.  But, if the pros are right, it probably won’t be this low for long.      

The online marketplace for crafts and handmade goods, Etsy (ETSY), saw its business soar during the pandemic.  However, due to concerns about slowing growth and stretched valuation amid the broader market sell-off, the stock is now down 50% from its November peak.  

Revenue soared to $617 million in Q4 2020, increasing 129% year-over-year.  While growth has slowed over the past three quarters as the company laps the blowout pandemic performance, demand for one-of-a-kind and vintage items is up.  Plus, ETSY’s loyal customers are spending more and shopping more often.  Sales per buyer jumped from $39 in the third quarter of 2020 to $47 in the third quarter of 2021, setting the stage for the holiday season. ETSY investors are eager for Q4 results, slated for Feb 24th.  

The number of buyers and sellers on Etsy, the fourth largest e-commerce site by customer visits, surged during the pandemic.  Due to impressive customer retention, the number of active Etsy users has nearly tripled over the past two years.  At present, Etsy connects more than 7.5 million active sellers with 96 million active buyers on the unique platform.  

For both buyers and sellers, there isn’t a similar marketplace offering the vast customer base or the breadth of unique products that Etsy has.  In a survey of customers who use Etsy’s platform, 88% said the company offers items not found elsewhere.  Customization is also a strong competitive edge as it allows buyers to search for or create something extra special.  According to the company, searches for personalized items are about 20% more likely to result in a purchase decision.

Growth has been tremendous, placing Etsy in an ideal financial situation. During the past 12 months, it had a 73.3% gross margin and a 23.3% operating margin, both of which have improved remarkably over the years.  The business also generated $583 million in free cash flow (on revenue of $2.2 billion) during the trailing-12-month period.

KeyBanc analyst Ed Yruma recently upgraded Etsy to Overweight with a $200 price target. The analyst said the company has some of the most compelling long-term secular growth opportunities in his coverage and that management set guidance reasonably for Q4. Plus, his firm’s Key First Look Data has pointed to stable to improving quarter-over-quarter trends.

Of the 27 analysts offering recommendations for ETSY stock, 20 rate the stock a Buy, 6 call it a Hold, and only one says to Sell ETSY.  A median price target of $245 implies a 67% upside for the stock.