ETSY Stock Study (8-4-23)

Posted by Mark on September 8, 2023 at 06:58 | Last modified: August 4, 2023 14:45

I recently did a stock study on Etsy, Inc. (ETSY) with a closing price of $82.92. The previous study is here.

M* writes:

     > Etsy operates a top-10 e-commerce marketplace operator in the U.S.
     > and the U.K., with sizable operations in Germany, France, Australia,
     > and Canada. The firm dominates an interesting niche, connecting
     > buyers and sellers through its online market to exchange vintage
     > and craft goods. With $13.3 billion in 2022 consolidated gross
     > merchandise volume, the firm has cemented itself as one of the
     > largest players in a quickly growing space, generating revenue
     > from listing fees, commissions on sold items, advertising services,
     > payment processing, and shipping labels. As of the end of 2022, the
     > firm connected more than 95 million buyers and 7.5 million sellers
     > on its marketplace properties: Etsy, Reverb (musical equipment),
     > Elo7 (crafts in Brazil), and Depop (clothing resale).

This medium-size company has grown sales at an annualized rate of 40.8% over the past decade.

EPS is a bit more complicated. 2015 is the first year as a publicly-traded company. I am excluding negative/fractional EPS in ’13-’16 [otherwise resulting in an inflated growth rate] to start with $0.68/share in ’17. The company takes a goodwill impairment charge of $1.0 billion in ’22 due to Depop and Elo7 acquisitions. This slashes EPS from $4.61/share (“normalized” per CFRA) to -$5.48, which precludes future growth rate projections. Effective immediately, I am overwriting the data point rather than excluding it. I consider this to be fair especially because CFRA seems neutral (at best) on the stock. The result is a 57.9% EPS growth rate since ’17.

For ’17-’22, [sales and EPS] lines are mostly up and narrowing despite an EPS dip in ’18.

PTPM is above the industry but below peer averages while increasing from 7.3% in ’17 to 20.3% in ’21 with a last-5-year mean (excluding ’22) of 15.1%. ROE is above peer and industry averages while increasing from 23.8% in ’17 to 80.9% in ’22 with a last-5-year mean (excluding ’22) of 43.3%.

Debt-to-Capital has been above peer and industry averages since ’19 with a last-5-year mean of 76.5%. While the number exceeds 100% in ’22, Value Line (giving a B+ rating for Financial Strength) is not concerned:

     > Although debt represented over 100% of capital at the end of 2022,
     > cash and short-term investments totaled $1.2 billion and the
     > company has only modest debt due over the next five years.
     > Additional funds can be sourced from the company’s $200 million
     > undrawn revolver and $29.1 million in long-term investments that
     > can be liquidated on short notice.

M* gives a “Standard” rating for Capital Allocation and is not concerned about debt either:

     > With our forecast for just 0.8 times average net leverage over the next
     > five years (net debt/adjusted EBITDA), a paucity of near-term debt
     > maturities, and a highly cash generative mode… balance sheet risk
     > appears minimal for the marketplace operator. We believe that Etsy
     > should encounter no difficulties in funding its investments in headcount
     > and platform development with internally generated funds, while
     > retaining substantial flexibility to invest in brand marketing and
     > strategic acquisitions. With no principal maturities until 2026, we
     > view Etsy’s balance sheet health as strong, despite the firm carrying
     > $2.3 billion in gross debt as of the end of the first quarter of 2023.

Quick Ratio is 2.6 and—nota bene—M* rates the company “Wide” for Economic Moat.

With regard to sales growth:

• CNN Business projects 7.7% YOY and 7.4% per year for ’23 and ’22-’24, respectively (based on 26 analysts).
• YF projects YOY 7.4% and 9.5% for ’23 and ’24, respectively (30 analysts).
• Zacks projects YOY 7.4% and 11.4% for ’23 and ’24, respectively (9).
• Value Line projects 11.9% annualized growth from ’22-’27.
• CFRA projects 6.5% YOY and 6.1% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 10.0% per year.

I am forecasting below the range at 6.0% per year.

With regard to EPS growth:

• CNN Business reports ACE contraction of 16.7% YOY and 5.6% per year for ’23 and ’22-’24, respectively (based on 26 analysts), along with 5-year annualized growth of 9.3%.
• MarketWatch projects 14.5% YOY and 17.4% per year for ’24 and ’23-’25, respectively (31 analysts).
• Nasdaq.com projects 20.4% and 28.1% per year for ’23-’25 and ’23-’26 [9, 9, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 13.6%.
• YF projects YOY 144% and 16.5% for ’23 and ’24, respectively (23), along with 5-year annualized growth of 16.0%.
• Zacks projects YOY contraction of 14.3% and 20.2% growth for ’23 and ’24, respectively (7), along with 5-year annualized growth of 6.5%.
• Value Line projects 15.2% annualized growth from ’22-’27.
• CFRA projects contraction of 8.6% YOY and 0.4% per year for ’23 and ’22-’24, respectively, along with a 3-year annualized contraction of 3.0%.
• M* projects long-term annualized growth of 14.6%.

How YF comes up with 144% for ’23 with ’22 being a negative number is [unknown to me and] a moot point.

I am forecasting below the long-term-estimate range (mean of six: 12.5%) at 6.0% per year. My initial value will be CFRA’s ’22 normalized EPS of $4.61/share.

My Forecast High P/E is 26.0. Since ’17, high P/E ranges from 32.1 in ’17 to 96.5 in ’19 with a last-5-year mean (’22 is NMF) of 89.1. The last-5-year-mean average P/E is 59.6. I am forecasting below the range.

My Forecast Low P/E is 14.0. Since ’17, low P/E ranges from 11.1 in ’20 to 52.3 in ’19 with a last-5-year mean (’22 is NMF) of 30.1. The 5-year median is 27.4 (’18). I am forecasting toward the bottom of the range [’20 and ’17 (13.8) are lower].

My Low Stock Price Forecast (LSPF) of $64.50 is default based on $4.61/share initial value. This is 22.2% less than the previous closing price, 19.8% less than the 52-week low, and 3.7% less than the ’22 low.

These inputs land ETSY in the BUY zone with a U/D ratio of 4.2. Total Annualized Return (TAR) is 14.1%.

PAR (using Forecast Average—not High—P/E) is 8.3%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 60 studies over the past 90 days (my study and 20 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 16.0%, 13.5%, 50.0, and 25.8, respectively. I am lower across the board. Value Line projects an average annual P/E of 35.0, which is lower than MS (37.9) and much higher than mine (20.0).

MS high / low EPS are $9.95 / -$5.40 vs. my $6.17 / $4.61 (per share). My high EPS is lower due to a lower growth rate. I think MS low EPS is unreasonably based on a one-time impairment charge. Furthermore, how are they calculating [percentage] projections off a negative base?

MS mean LSPF of -$10.50 is an invalid consequence of that negative base. The median of $35.00 is 45.7% less than mine.

Despite this apparent craziness, MS TAR of 39.3% is much higher than mine, which falls short of my 15.0% target.

MOS in the current study seems to be robust.

I track different valuation metrics. PEG is significantly overvalued at 5.5 per Zacks and 2.2 per my projected [forward] P/E. Relative Value [(current P/E) / 5-year-mean average P/E] is significantly undervalued at 0.30. Kim Butcher’s “quick and dirty DCF” prices the stock at 30.0 * [$5.75 – ($0.00 + $0.10)] = $169.50 thereby implying the stock to be 51.0% undervalued.

Despite being a BUY under $91/share, I would look to acquire shares under $85 to qualify TAR. The stock been quite volatile, which suggests likeliness to trade up and down and hit this level. It’s also there right now with last night’s close.