Is Now a Good Time to Buy Etsy?

It wasn’t that long ago Etsy (NASDAQ:ETSY) traded just shy of $300 per share. That was near the end of 2021 when the marketplace for vintage craft supplies reached peak popularity. Fast forward a few short years and Etsy shareholders have suffered a turbulent ride that led to the stock tumbling to under $50 per share in recent days.

The share price has come down so much since those heady days that it’s worth asking the question now, is Etsy too low to ignore? 

The Valuation Argument For Etsy

The bad news for Etsy shareholders is that subsequent to the treacherous share price decline over the past few years, Goldman Sachs has downgraded its price target to $45 per share from $70 on the back of increasing competitive threats and market share headwinds.

It’s easy to see from where the lackluster view originates. After all, revenue growth has been muted in the low to single digits for the past 5 quarters. If that persists, it’s easy to see why enthusiasm may dry up.

But there comes a time when the price of a company slips so low that it makes for a compelling buy when viewed through a valuation lens.

Etsy is now trading at a price-to-earnings ratio of 21.4x, a multiple that is by no means lofty, especially when considering earnings growth forecasts that range from 17% to 21% annually. If those predictions are anywhere close to being accurate, Etsy appears to be on sale at this time.

Analysts seem to agree with that assessment and have a $62.05 per share price target on Etsy at this time, suggesting just north of 20% upside at this time.

Interestingly, the Goldman Sachs price target of $45 per share is the lowest among all analysts covering the stock. The range spans from $45 to $105 per share on the high end.

When a discounted cash flow forecast analysis is run over a 5-year time horizon, the projections become even more bullish with upside to as high as $79 per share on the table.

Even on a price-to-sales multiple, Etsy appears quite cheap, trading at just 2.1x last twelve month sales, so is it a stock worth buying now?

Is It Time to Buy Etsy?

If Goldman Sachs is right and competitive threats are increasing for Etsy that will result in diminishing market share, caution is certainly warranted. But at some point, a company needs to be examined from a reward-to-risk perspective and it’s here that Etsy comes up trumps.

The valuation is compelling at this time, and the downside seems quite limited, even to the most bearish Street forecast, when the fundamentals are examined.

As evidence of the firm’s solid financials, look no further than the stellar gross margins that have dipped below 70% in only one of the past twelve quarters or the operating income that has ranged between $70 and $100 million over the past four quarters, in spite of lackluster revenue growth.

When we turn our attention to the balance sheet, it’s not quite as attractive with around $2.2 billion of debt sitting on the books but that the company also has nearly $1 billion in liquid assets to offset that, so the debt is by no means a serious concern at this time.

Now add to the mix the commitment of the company to buy back shares quite aggressively quarter after quarter and it seems insiders have a lot of conviction that the share price is not reflective of what the company is actually worth.

So sure, Etsy gets a failing grade on price momentum over the past few years, but it seems only a matter of time now before investors spot the discrepancy between where it’s trading at and where consensus fair value sits - much higher. When that happens, it won’t be a surprise to see Etsy win back support from institutional investors and close the gap towards analysts’ consensus price target of $62 per share.