Is it too late to get into this millionaire action?
Etsy (NASDAQ: ETSY) has exploded since its IPO in 2015 to $ 16 per share. The action charged over $ 200, most of which took place in the past 12 months – Etsy was under $ 40 in March 2020. An initial investment of $ 80,000 at Initial Public Offering the price would have made you a millionaire by now, so it’s fair to ask if there’s more room for the stock to go higher. Etsy has a great business model for today’s economy, but is there still a reason to buy at this price?
Etsy is trading at a premium right now
Etsy is expensive based on measures of relative valuation, but these are still important to consider in the context of high growth stocks. Etsy shares trade at a selling price ratio of 16 and one before price / earnings ratio from 69.2. It wouldn’t make sense to pay that kind of premium for a more mature company like Coca Cola Where Walmart, who are already so big and prosperous that they cannot grow very quickly.
Etsy is a different story, however. The company has experienced average annual growth of around 60% over the past three years, and analysts forecast compound expansion of over 30% over the next several years. Hypothetically, a 30% CAGR in earnings would lead to a forward P / E ratio of 17.5 in five years if the price never changes.
This is why common valuation ratios such as price / earnings, price / book, and enterprise value / EBITDA cannot be applied to growth values in the same way value stocks. A future disruptive industry leader could easily double or triple in size over the medium term, and bullish investors are more than happy to pay a premium on current fundamentals to own these future leaders. People who are optimistic about Etsy’s trajectory assume that the company’s future earnings growth will be more than enough to drive the share price higher.
Etsy’s place in the future of e-commerce
E-commerce has been a growing force in the retail landscape for over a decade, and the impacts of the 2020 global pandemic have accelerated this trend. Online sales jumped to over 21% of total US retail sales in 2020, up from 15.8% in 2019. As the fourth most visited e-commerce site in the United States, Etsy is in an excellent position to capitalize on this growth. Unlike competitors Amazon, eBay, and Walmart, Etsy has more niche reputation as a destination for handcrafted and personalized products made by individuals. There are other product categories on the site, but Etsy still has a unique place among the major ecommerce platforms. The company added 1.6 million active sellers last year, and its outstanding performance with products such as face masks demonstrates the adaptability of buyers and sellers on the site.
If vaccinations and herd immunity are effective in reducing the impact of COVID-19 on public health, we will likely see an increase in demand for physical stores. Early indications are that people are excited to be back to normalcy, with pent-up demand for trips, experiences and public activities. Online sales may lose some of the retail pie in the short term.
Regardless, the surge in e-commerce performance over the past year has been the acceleration of an existing trend, and it will continue to develop in the medium term. Different retailers have invested more in optimizing their digital channels, consumers are more comfortable than ever with shopping at home, and logistics are more efficient than ever.
There is every reason to expect Etsy to grow alongside the other leaders in e-commerce. However, fragmentation can be a problem that slows down this rate of growth. Solutions from companies such as Square and Shopify make it easier than ever for small sellers and shops to serve customers online. To deliver value to its sellers, Etsy will need to remain price competitive or provide new services that are unmatched anywhere else. There is a good chance that we will see more and more small sellers remaining independent. This momentum won’t be enough to dethrone the craft giant in the next few years, but it’s something investors need to watch out for.
It’s not too late to get on Etsy, but it’s probably too late to expect the same scale of returns the stock has generated since its IPO. There is clearly room for improvement here, but a lot of future success is already assumed in current prices, as evidenced by the aggressive valuation ratios.
If you like the business and believe in the model, you can buy it today without the guilt or hesitation. There is a good chance that Etsy will overtake the market in the next few years. Don’t be shocked if the stock experiences volatility as the market and the retail world rebalance towards a post-pandemic equilibrium.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.