The analyst firm reiterated its $14 price target for the online crafts marketplace.
Wedbush analysts Gil Luria and Aaron Turner said the downgrade is due to higher counterfeit risk than the analyst firm previously anticipated. Following analysis of the products on Etsy and discussions with IP lawyers, the analysts believe "questionable seller practices may draw increased scrutiny, eventually limiting volume growth."
The analysts said counterfeit candidates include items that infringe on Louis Vuitton (LVMUY), Chanel, Michael Kors (KORS), Disney (DIS), and NFL brands. A sample of high risks listings indicate "some violations may be 20x more likely on Etsy than eBay (EBAY) and even more likely than Alibaba's (BABA) Aliexpress," the analysts wrote.
The analyst firm expects Etsy to report earnings of 14 cents a share for 2015 and 28 cents a share for full year 2016.