Morgan Stanley and Goldman Sachs both initiated coverage of Etsy Monday, with Morgan Stanley rating the stock equal-weight and Goldman rating it neutral. Wedbush had previously begun coverage but on Monday downgraded the stock to underperform from neutral, pointing to a higher-than-expected risk of goods sold on the site being counterfeit.
Since closing its first day of trading at $30, Etsy have trended downwards ever since, closing $Friday at 22.71, a loss of nearly 35%. Shares were falling sharply in pre-market trading on Monday, down 9.7% to $20.50.
Brooklyn-based Etsy offers a unique value proposition to a niche market, with Goldman Sachs estimating that it has the potential to reach a $70 billion market of 459 million buyers and 140 million crafters, and Morgan Stanley estimating an addressable market of at least $34 billion. Both companies agree that Etsy's potential for success is already priced into its stock.
Here's what the analysts had to say:
Heath P. Terry, Goldman Sachs (Neutral, $20 PT)
"Etsy has seen early success in developing an online marketplace across a fragmented base of sellers expanding their market beyond crafts fairs and bazaars by enabling discovery, purchase, and fulfillment. While we view Etsy as a leader in a potentially large addressable market segment, with the stock trading at 8X 2016E EV/Sales, we believe a high degree of success is already priced in.
While Etsy offers products across a broad range of categories and in multiple markets, the company focuses on a small portion of total sales across these categories. However, over time, Etsy should be able to address a larger portion of its product categories and expand its addressable market by increasing ease of use, driving broader adoption and engagement by both buyers and sellers, and benefiting from the category increasingly shifting online. Specifically, we believe Etsy is underpenetrated in both active buyers and sellers. We estimate Etsy's 20mn active buyers represent roughly 4% of the potential 459mn buyers in the company's primary markets while Etsy's 1.4mn active sellers represent roughly 1% of the potential 140mn crafters in the company's primary markets.
We believe Etsy faces broad competition in ecommerce, particularly from eBay, for both buyers and sellers. To grow buyers, Etsy is investing meaningfully in search engine marketing and its desktop and mobile product functionality to enhance buyer engagement. Though growth of active sellers to date has largely been organic, Etsy is focused on enabling success of new sellers as well as driving enough sales volume to established sellers to continue to be a significant sales channel."
Brian Nowak, Morgan Stanley (Equal-Weight, $20 PT)
"Etsy has a strong competitive positioning as an online marketplace designed to connect sellers and buyers of unique and often handmade crafts and items. It has brand loyalty and recognition and, in our view, is the only pure-play player in this category online. Etsy's main competition is still offline - arts and crafts fairs, boutiques, etc - and there is a $34bn addressable crafts market in the U.S. alone. Etsy still only makes up 3.9% of this crafts consumer expenditure. Even with 25% estimated forward global merchandise sales (GMS) growth we still only model the company to reach ~7% of total category expenditure. Etsy's unique crafts category offers ample runway for top-line growth. In addition, as the user base matures and becomes familiar with the breadth of products on the site we see Etsy's addressable market expanding to penetrate even more of the total $1tn US and $2tn global retail spend on Garden, Home, Arts, Crafts, Furniture."
Gil Luria, Wedbush (Underperform, $14 PT)
"We expect Etsy to enjoy rapid near-term growth within its niche as it increases marketing spend, including a strong Q1 report on May 19. However, our analysis and discussions with IP lawyers lead us to believe questionable seller practices may draw increased scrutiny, eventually limiting volume growth.
Our research indicates as many as 2 million items on Etsy (>5% of all merchandise) may potentially be either counterfeit or constitute trademark or copyright infringement. We believe the share of GMS may be greater considering Etsy has become a go-to destination for counterfeits. Counterfeit candidates include items infringing on Louis Vuitton, Chanel and Michael Kors, as well as a wide range of Disney and NFL brands. Sample of high risk listings indicates some violations may be 20x more likely on Etsy than eBay and even more likely than Alibaba's Aliexpress.
If Etsy chooses to continue to ignore these potential violations, we believe it could tarnish its brand with both buyers and sellers. Considering the broad backlash on Alibaba regarding inauthentic merchandise, we expect added scrutiny given the social responsibility ethos at the core of its Etsy's brand."