Shares of Etsy (NASDAQ: ETSY ) certainly made a monster move higher following an earnings report yesterday that beat on both the top and bottom line. Etsy stock was up over 15% on the heels of those earnings, reaching a fresh, new all-time high. While certainly a pop in the stock would be warranted given the beat , the reaction was a little too extreme. Time to play for a pullback and take a short-term short position in Etsy.
InvestorPlace writer Karl Utermolen broke down the earnings report in Etsy. Earnings were a big upside surprise at 32 cents, easily surpassing analyst estimates of just 20 cents per share. Revenues were also a beat at $200 million, although only slightly better than the expectations of $194.9 million.
The company also guided somewhat higher with revenues for 2019 now looking to be $779 million-$797 million, compared to prior consensus of $776.2 million.
The question isn't whether Etsy is growing, but rather how much you want to pay for that growth. The trailing price-to-earnings multiple for ETSY stock just raced past 100 and now stands at by far the highest over the past year. Price to sales paints a similar extreme with a ratio over 14. ETSY is most assuredly priced for perfection.
The technicals are looking extreme as well. 14-day RSI is well above the overbought reading of 70 and near the highest levels in the past year.
MACD is also at an extreme and approaching areas that marked significant short term tops in the past. ETSY stock is trading at a massive premium to both the 20- and 50-day moving averages, another sign of overexuberance.
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More significantly, ETSY stock is responding in a similar fashion to the prior two earnings announcements (highlighted in gray in the chart). In both cases, Etsy stock gapped sharply higher only to subsequently retrace much of those gains. Ultimately ETSY reverted back to the 20- and 50-day moving average area in both instances. Given that ETSY is now even more overbought and overvalued, I expect the retracement to be even greater.
Traders looking to add a short position to the overall portfolio would do well to consider adding ETSY at current levels. I would target a move back below the $60 area as my initial profit objective. Option traders may want to consider the April $65 puts at $3 as a viable alternative, especially given the post-earnings implied volatility crush.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility .
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