Summary
- Consumer Discretionary has led the market for much of 2023, but some names are back to being stretched on valuation.
- Etsy appears priced right when assessing valuation gauges and uncertain earnings growth this year.
- I see bearish trends on the chart, though, with one key price point to monitor around earnings next week.
Etsy (ETSY) sports high growth after this year with positive free cash flow. It's not your typical speculative discretionary stock. I'm a hold, though, as the valuation is no longer cheap after shares have more than doubled off the June 2022 low.
The rally is not all that surprising given the massive strength in the American consumer as evidenced by the January Retail Sales data and recently strong card-spending figures from BofA. More clues on the consumer will be seen in Etsy's Q4 report next week.
Consumers Doing What They Do Best
Bank of America
According to Bank of America Global Research, Etsy is a US-based e-commerce company that operates online marketplaces connecting nearly 100mn buyers and 9mn sellers globally. It specializes in handmade and/or vintage items, art, and craft supplies. As of 2021, Etsy generated $13.5bn in gross merchandise sales and $2.3bn in total revenues. Revenue is primarily generated from listing and transaction fees, seller services such as advertising, and shipping labels.
The New York-based $16.8 billion market cap Internet and Direct Marketing Retail industry company within the Consumer Discretionary sector trades at a high 34.9 trailing 12-month operating price-to-earnings ratio and has negative GAAP earnings over the past 12 months (care of a major one-time impairment charge reported in its Q3 report last year) while not paying a dividend, according to The Wall Street Journal.
Etsy has emerged as a high-margin market that is differentiated from other large retailers, helping to make this growth stock's earnings and free cash flow positive. With solid sales growth now, and tough 2021 comps having passed, better earnings headline risk is likely. Key risks ahead of the Q4 report include how discretionary spending holds up, but recent retail sales data suggest Americans keep on spending. That optimism has been reflected in ETSY's rebounding share price this year. Watch out for clues on how the firm is gaining penetration into new markets as well as gaining market share in existing regions and with current demographics.
On valuation , analysts at BofA see earnings having fallen 10% in 2022 and giving back another 4% this year. Per-share profit growth is seen as rebounding at a healthy clip in 2024, though. The Bloomberg consensus forecast is not quite as upbeat as what BofA sees. With high operating and GAAP earnings multiples, you might say the stock is pricey. But let's take a look at ETSY's historical price-to-sales ratio. Seeking Alpha shows a five-year average multiple of 10 and a current trailing P/S of 7.3, shares may be decently priced. The forward PEG ratio is 2.5 compared with a 2.66 5-year mean, so that is about fairly valued. Overall, the valuation looks about fair here.
Etsy: Earnings, Valuation, Free Cash Flow Forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2022 earnings date of Wednesday, Feb. 22 after market close with a conference call immediately after results hit the tape. You can listen live here .
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $0.82 compared to $1.11 of per-share profits earned in the same period a year ago. Aside from last quarter's steep miss due to the impairment charge, the company has topped analyst estimates in all cases since August 2020. That's a bullish trend for investors, but the stock price reaction history is more mixed with the stock wavering between -15% and +15%.
Considering that the at-the-money straddle using the options expiring soonest after the earning date is priced at just 9% per ORATS data, that looks cheap to me. Being long premium ahead of the earnings print looks like a decent risk/reward play.
ETSY: Cheap Options Ahead of Earnings
The Technical Take
With a fair valuation and cheap options ahead of earnings, I see some bearish risks on the chart. Notice in the graph below that ETSY has resistance near $150 - not far from the current stock price. What's more, I spot a bearish ascending wedge pattern. A move above $150 would no doubt be bullish and lead to an upside target near $220, but I see risks skewed to the downside. And that argument is augmented by negative RSI divergence and declining volume on the recent run up. Buying on a fall to the flat 200-day moving average would go along with buying on value too.
ETSY: Bearish Ascending Wedge
The Bottom Line
ETSY's valuation ahead of earnings seems fair while the chart is bearish. If the profit outlook is boosted next week and the stock rallies above $150, a bullish growth case could be made. For now, buying on a dip with a proper margin of valuation safety is the prudent play.
For further details see:
Etsy: Shares No Longer A Steal After The Big Rally, Earnings On Tap