On Thursday, Wells Fargo adjusted its outlook on Etsy (NASDAQ:ETSY), reducing the price target to $47.00 from the previous $58.00, while maintaining an Underweight rating on the stock. The firm cited a downward revision of third-quarter Gross Merchandise Sales (GMS) by approximately 1.5% to a year-over-year decline of 3.0%, which sits at the low end of Etsy's guidance for a "low-single digit" year-over-year decrease.
The fourth-quarter GMS guidance is also anticipated to drop between 1% and 3% on a constant currency basis, compared to the market's expectation of a 1.3% year-over-year decrease.
The revised third-quarter GMS forecast falls below consensus due to a combination of mixed consumer trends, increased competition from low-cost e-commerce alternatives, and weaker traffic. Wells Fargo highlighted a worsening quarterly constant currency GMS trend, expecting a more significant decline into the third quarter at -3.5% from -1.9%. For the fourth quarter, the firm estimates a GMS decline of 1.1%, with a year-over-year constant currency decrease of 3.2%, which is slightly better compared to the third quarter due to October comparisons and in line with seasonal patterns.
Wells Fargo expects Etsy's margins to be comparable or slightly below those of the third quarter, with full-year EBITDA margin guidance remaining around 27.0% to 27.4%. The firm forecasts a third-quarter EBITDA margin of 26.6%, which represents a 200 basis point decline year-over-year, and a fourth-quarter margin of 28.0%, flat year-over-year, leading to a full-year EBITDA margin of 27.1%, a 30 basis point decline year-over-year.
The analysis also pointed out Etsy's investments in key research and development initiatives and an increase in paid social marketing, which is expected to rise by 50 basis points year-over-year in the second half of 2024 as a percentage of GMS. The firm projects low-single digit percentage declines in Gross Merchandise Volume (GMV), coupled with a similar percentage increase in operating expenses, resulting in a 240 basis point margin deleverage through 2027, compared to the previous estimate of 130 basis points.
Wells Fargo noted that third-quarter GMS growth was impacted by a challenging September comparison and changes to Etsy.com's search ranking. The firm estimates that Etsy.com's GMS declined by 2.9% year-over-year in July and August and by 5.3% year-over-year in September. Additionally, updates to Etsy.com's product search rankings on August 28, aimed at optimizing discovery, could have long-term benefits despite potential short-term drawbacks.
Etsy's renewed focus on its mobile app, which accounts for 42% of GMS, and the beta testing of its loyalty initiative, Etsy Insider, in September could enhance user frequency. However, the initial impact of modifications to Etsy's search and discovery on traffic and conversion remains uncertain.
In other recent news, e-commerce companies Etsy and Wayfair (NYSE:W) have been the subject of various analyst ratings and projections. Deutsche Bank expressed caution regarding both companies, citing weakening data. For Etsy, the bank highlighted concerns about a potential decline in Gross Merchandise Sales (GMS) in the third quarter.
Despite this, Truist Securities maintained a Buy rating on Etsy, citing solid GMS tracking and new strategic initiatives. However, Cantor Fitzgerald and Piper Sandler initiated coverage on Etsy with a Neutral rating, citing potential structural challenges and concerns over discretionary spending.
Wayfair's slowdown in sales growth since July was noted, but quarter-to-date trends suggest some stability compared to the second quarter. Despite this, Deutsche Bank sees Wayfair as having an attractive risk/reward profile at the current levels, especially considering the anticipated lower rate environment that could spur housing activity and, consequently, growth in the home furnishings industry.
These are recent developments for both companies, with Etsy reporting a revenue growth of 3% to $648 million and Wayfair maintaining its position as a leading share in its category. Both companies' recent trends raise concerns as they head into the crucial holiday quarter. Etsy's investments in gifting and long-term value-centric product experiences are recognized but may not immediately translate into increased gross merchandise sales due to tepid mobile user trends.
InvestingPro Insights
To complement Wells Fargo's analysis of Etsy, InvestingPro data offers additional insights into the company's financial position. Despite the challenges highlighted in the article, Etsy maintains impressive gross profit margins of 70.78% for the last twelve months as of Q2 2024. This aligns with one of the InvestingPro Tips, which notes Etsy's "Impressive gross profit margins."
The company's P/E ratio (adjusted) stands at 18.99, which is relatively low compared to its PEG ratio of 0.15. This supports another InvestingPro Tip suggesting that Etsy is "Trading at a low P/E ratio relative to near-term earnings growth." This valuation metric could be of interest to investors considering the stock's recent price movements and Wells Fargo's revised outlook.
It's worth noting that Etsy's stock price has seen significant volatility, with a year-to-date price total return of -36.04% as of the latest data. This volatility is reflected in another InvestingPro Tip, which states that "Stock price movements are quite volatile."
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Etsy, providing a broader perspective on the company's financial health and market position.
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