Forget Shopify and Buy Soaring Etsy Stock Before Q4 Earnings?

Arts and craft fair-style e-commerce firm Etsy (NASDAQ:ETSY) ETSY has outclimbed Shopify (NYSE:SHOP) SHOP, Zoom Video ZM, and many other pandemic stars, and is neck-and-neck with Tesla’s TSLA torrid pace over the past year. The firm has ripped off back-to-back quarters of around 130% revenue growth, as consumers turned to digital channels.

The question heading into its Q4 earnings release on February 25 is will Etsy be able to keep up the pace, or will things cool off as people return to something closer to their normal lives…

Etsy’s Pitch

Etsy is an e-commerce marketplace that allows individuals and small businesses to sell everything from clothing and jewelry to art and home décor. The online retailer that was founded in 2005 and went public in 2015 also owns musical instrument marketplace Reverb. And Etsy’s two-sided online marketplace has become far more popular during the pandemic.

The Brooklyn-based company has carved out a solid niche within the booming industry by selling items consumers might not be able to find on Amazon AMZN and eBay EBAY. Etsy makes money from every transaction, as well as advertising and paid search. The company is also continually trying to improve its features for both buyers and sellers.

Last quarter, Etsy grew its active sellers by 42% to 3.7 million, while its active buyers jumped 55% to 70 million. The company’s gross merchandise sales soared 119% to $2.63 billion and its overall Q3 revenue jumped 128% to $451 million—to fall just short of Q2’s 137% revenue growth.

Face mask sales have helped drive some of Etsy’s pandemic expansion, which is clearly a cause for concern since these sales don’t appear sustainable. Luckily, excluding mask sales, Etsy’s gross merchandise sales still climbed 93% in the third quarter.

Outlook

Etsy shares have skyrocketed 315% in the last year and over 60% in the last three months. The stock popped 3% during regular trading hours on Friday to $227 a share, to put it not far off its early February records. And the stock is not just a coronavirus anomaly. In fact, Etsy’s 970% run over the last three years helps it outpace Shopify, and its growth over the last five years is even more impressive.

Etsy is trading at its highest forward sales multiple at the moment. Yet, at 15.1X forward 12-month sales, it represents a big discount to Shopify’s 42.9X. And it rests at around 61 in terms of the Relative Strength Index—an RSI above 70 is often regarded as overbought, with any number below 30 considered oversold.

The company was also growing long before the pandemic, with its 2019 and 2018 sales both up roughly 36%. With this in mind, Zacks estimates call for its adjusted Q4 earnings to surge 136% to $0.59 a share on 91% stronger revenue.

Etsy’s fiscal 2020 revenue is projected to climb roughly 100% from $818 million in FY19 to $1.63 billion, with its adjusted earnings expected to jump 182%.

Bottom Line

Etsy’s earnings revision help it land a Zacks Rank #3 (Hold) right now. The company has topped our earnings and revenue estimates in the last two quarters, and even though the pandemic conditions will be nearly impossible to recreate, the e-commerce market is still in the early days.

For instance, e-commerce accounted for roughly 14% of total U.S. retail sales in the third quarter. This was up from 11% last year, but down from a record 16% in Q2. However, a slowdown appears to be coming, with Etsy’s 2021 revenue projected to climb 10% above a hard-to-compare FY20, with its EPS figure currently projected to slip 10%.

Wall Street remains high on Etsy, and 12 of the 15 brokerage recommendations that Zacks has for the stock come in at a “Strong Buy” right now. That said, investors might want to hold off on the red-hot e-commerce stock until Etsy executives provide updated guidance on what they expect life after the vaccine might look like.

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