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Etsy Stock Is Expensive and Growth Will Slow, Morgan Stanley Says

Morgan Stanley analyst Lauren Cassel downgraded Etsy to Underweight from Equal Weight and lowered her price target for the stock to $38 from $52.

The e-commerce website focused on handmade items and craft supplies, has dropped 14% year to date. And still Wall Street might be underestimating headwinds, analyst Lauren Cassel says.

Stock in Etsy, the e-commerce website focused on handmade items and craft supplies, has dropped 14% year to date. And still Wall Street might be underestimating headwinds facing the company, Morgan Stanley analyst Lauren Cassel says, predicting even harder times ahead.

In a Thursday note, Cassel downgraded Etsy (ticker: ETSY) to Underweight from Equal Weight and lowered her price target for the stock to $38 from $52. That is about 10% lower than the price as of Wednesday’s close.

The company will confront issues that could drag on sales and profit margins, Cassel wrote. She lowered expectations for Etsy’s 2020 gross merchandise sales to $6.28 billion from $6.50 billion and cut the estimates for earnings before taxes, interest, depreciation, and amortization, or Ebitda, to $215 million from $227 million. That is about 7% below Wall Street consensus, Cassel said. “The headwinds we previously laid out in our bear case scenario now appear more likely to be the base case.”

For one, sales-tax legislation in some states could result in higher taxes, leading more shoppers to abandon purchases, denting gross merchandise sales. For another, Etsy has pulled back on investments in product-listing ads and instead is trying to make sellers foot more of the marketing costs. But if sellers’ marketing spending doesn’t fill the gap, gross sales on Etsy’s website will likely see some meaningful setback.

The company didn’t immediately respond to a request for comment.

The company introduced “free shipping” on its website in the summer, which means sellers can now bundle shipping costs into the item price, and the site’s gross merchandise sales will be lifted as a result. Wall Street has generally been upbeat about it, but Cassel noted that the benefits might be overestimated, because not all sellers will be able to pass on the shipping costs to buyers.

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Such headwinds, on top of a shorter holiday calendar this year—will likely “more than offset” the free shipping benefits, she wrote.

Etsy management has had success in accelerating sales growth through investment in search and marketing, while also expanding margins through value-added seller services and disciplined expense control. But Cassel is worried that the “lower hanging fruit” has been picked and continued high growth might be difficult to achieve.

What’s more, despite the stock’s tumble this year, shares are still trading at a lofty valuation of 55 times 2020 earnings estimates, according to FactSet. That is largely attributable to the company’s “scarcity value,” Cassel said, explaining that it operates in a specific e-commerce niche that has been holding up well even under the threat of much-bigger players such as Amazon.com (AMZN). Still, she thinks the stock is too expensive given the weaker growth expectation, and multiples will likely further collapse next year.

Esty shares were down 2.8% to $40.97 Thursday afternoon, after falling as much as 5% earlier in the day. The S&P 500 was up 0.1%.

Write to Evie Liu at evie.liu@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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