In 2019, Etsy share price hovered around the $50-60 range. Then the pandemic came in full force and Etsy got swept up with “lockdown era” stocks like Zoom. In a virtual heartbeat, Etsy was trading up at $294 per share by November, 2021.
Then the house of cards came tumbling down. More recently, Etsy has traded closer to $94 per share. Is the crashing share price justified or overblown?
The Bull Case For Etsy
It’s clear that sentiment has played an enormous role in the turbulence Etsy share price has experienced. If fundamentals alone were the driving factor, the share price would have slowly and steadily creeped higher since 2019.
Here’s a look at year-over-year revenue growth over the past few years:
- 2020 Q2: 136.7%
- 2020 Q3: 128.1%
- 2020 Q4: 128.7%
- 2021: Q1: 141.5%
- 2021 Q2: 23.4%
- 2021 Q3: 17.9%
- 2021 Q4: 16.2%
- 2022: Q1: 5.2%
- 2022 Q2: 10.6%
- 2022 Q3: 11.7%
- 2022 Q4: 12.6%
- 2023 Q1: 10.6%
What is remarkable from the trend is not only that it’s an unbroken streak of revenue growth but also that the company has managed to grow in 2021 & 2022 following already record high base revenue levels in 2020. That suggests customers didn’t just bungee into Etsy during the pandemic, and bounce off again but instead they stuck around and kept buying. In short, the product was sufficiently good to build loyalty. More on this key discovery below.
Something else of real interest to shareholders is management’s decision to repurchase shares. During Q1 2023, the Board approved a repurchase of 1.2 million shares of common stock, amounting to $148 million. Do those in the know think Etsy is undervalued?
Is Etsy Undervalued?
We decided to investigate whether management has its finger on the pulse or it this another case of a speculative share repurchase plan that will go awry? As it turns out the numbers look really good. A 5 year discounted cash flow analysis places fair value for Etsy at $121 per share. That’s 30.2% higher than where the share price currently sits at the time of research.
That valuation is not entirely a surprise. After all, Etsy has been able to post a steady streak of operating income figures in the black for at least 12 quarters. That shows management has a good command on operating costs, and knows just what to do to build the cash balance of the firm, which most recently sat at $786 million.
Where Is Etsy Headed Next?
We think the future looks bright for Etsy. According to a study by Piper Sandler, Etsy reactivated 24 million dormant customers last year. That’s real evidence of what the revenue figures above signaled; customers are using Etsy in droves. They are liking the product and using it again and again.
One reason for that is the company’s adaptation to current search trends. The search queries during the pandemic are different to those now and Etsy is better at identifying the needs of its customers and delivering on them.
Add a delighted customer to an undervalued share price alongside a management repurchase program, and you’ve got a compelling stock to put on your watchlist and monitor. All it needs now is a technical buy signal to look attractive again.