Is Etsy Backing Crafts to End Its Five-Month Downtrend?

Etsy Inc. NASDAQ: ETSY is forming a downtrend, but it can stitch its bottom to its long-term decline.

On Nov. 1, the online marketplace for handmade and vintage items posted revenue growth for the first time since December 2021. Revenue rose 7% to $636.3 million.

A look at MarketBeat’s Etsy earnings page shows that the company has beaten analysts’ expectations on both the top and bottom lines over the past two quarters.

So why not more excitement?

To answer that, look at what’s on the horizon. Analysts expect earnings to rise 59% this year to $4.30 per share, with 6% growth next year to $4.56 per share. Both forecasts were revised lower recently.

In the third-quarter conference call, Etsy CEO Josh Silverman pointed to significant pressure on consumer discretionary spending on products, including high inflation, rising interest and mortgage rates and shrinking savings, leaving a tight margin.

An increasingly competitive retail environment

“These issues are magnified for lower-income shoppers, and we’re feeling the impact on Etsy’s marketplace,” Silverman said. “We also face an increasingly competitive retail environment with a very strong emphasis on deep discounting and in some cases competitors investing at potentially unsustainable levels in marketing and promotions.”

In the filings, Etsy lists competitors including Amazon.com Inc. NASDAQ: AMZN, eBay Inc. NASDAQ: EBAY, Alphabet Inc. NASDAQ: GOOGL, Alibaba Group Holding Limited NYSE: BABY and Meta Platforms Inc. NASDAQ: META.

Clearly, these are large companies with deeper pockets than Etsy and are likely able to offer some big discounts to increase volume.

In its latest annual report, Etsy said, “Many of these competitors offer low-cost or free shipping, fast delivery times, favorable return policies and other features that may be difficult or impossible for our sellers.”

While Silverman and company’s assessment of Etsy’s competitive market position is accurate, his verbosity on the earnings call did not seem to inspire investor confidence.

Green shoots evident in Q3

However, Silverman also hinted at “green shoots” that were evident in the third quarter.

For example, the company has made improvements to how sellers can list their items and refined its algorithms with machine learning and artificial intelligence. It also implemented new promotions to move goods faster.

Being a leader for consumers is also a challenge. Silverman said only 12 percent of shoppers consider Etsy the most important place to shop for gifts, with association rates even lower for other major categories like home, lifestyle and style.

Another reason the stock didn’t rise on earnings and revenue: Guidance for the current quarter was weak, as the company forecast a small decline in gross goods sold. The management added that the situation could worsen if conditions for consumers deteriorate.

Etsy’s smaller size makes it more volatile

As a mid-cap stock, Etsy is not tracked in the S&P 500, although it is considered a consumer discretionary stock. Its smaller size also makes the stock more volatile than larger online sellers.

For example, Etsy’s beta is 1.86, meaning the stock is about 1.86 times more volatile than the overall market, indicating higher risk.

Stocks with smaller market capitalizations tend to be more susceptible to market fluctuations because they have lower liquidity and potentially less stability.

A look at Etsy’s chart shows that the stock recently bottomed above its Nov. 2 low of $58.20.

Buyers are keeping the stock above recent lows

This suggests potential support, indicating that buyers are ready to step above this previous low, preventing further declines, at least for now.

For now, it is too early to say that the bearish sentiment is reversing. Etsy’s current downtrend is in place after a failed rally attempt in early June, when bullish trading was accompanied by low volume, meaning buyers were less convinced than sellers.

This trend continues. The stock’s volume up/down ratio is 0.7, which means that the trading volume for declining stocks is 30% higher than that of rising stocks.

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