ETSY | New Best Idea Short. 50% Downside Over 12 Months. We’re adding ETSY as a Best Idea Short, as we think the stock has ~50% downside over a 12-month time period. The reality is that there are few business models that benefitted as much from the pandemic as ETSY, as organic revenue growth accelerated from 20-30% to over 100% over the past year and a half. In effect, ETSY pulled forward 3-4 years of growth in its model and leveraged both Gross and SG&A margins by a combined 1,000+bps and is now clocking in at a 20%+ EBIT margin, a level which is absolutely unsustainable. Our math suggests that the pull-forward in growth results in ETSY tapping into ~70% of its addressable market (Millennial and GenX females), making the model far more mature than it was pre-pandemic. At the same time it is running out of TAM, we see the company accelerating acquisition activity to grow outside of its core, which should at a minimum be a multiple deflator, and is largely dilutive to the P&L and financial returns. Pre-pandemic, this company earned between $0.60-$0.75 per share, which jumped to ~$3.00 with outsized growth and fixed cost leverage. The consensus is looking through the air-pocket of growth, and is forecasting that earnings double again over a TAIL duration to over $6 per share. We think that’s far too optimistic, and think that EPS for the next two years comes in 30% below the Street. The stock is trading near all time highs, despite the fact that the latest quarter showed a clear crack in the trajectory of buyers using the platform, and the financial deleverage that comes with it. In looking at EV/Gross Profit, which we think is the best way to value ETSY relative to other e-comm models, we see that ETSY is trading at 19x EV/GP, which is nearly double the multiple we saw pre-pandemic, and is trading at more than 2x AMZN’s multiple, which is a far superior model in every way, shape and form. As growth continues to slow and the model deleverages, this ‘peak on peak’ earnings/valuation dynamic should deflate, and by the time estimates are revised downward to what we’re modeling, we should see the multiple compress by 30-40% on a down earnings year in 2022, which suggests a stock closer to $120, or roughly $100 below where it’s trading today. We're going to host a black book on September 17th at 12:30pm to review the full thesis. Best Idea Short.
WEBR: Taking Weber higher on our Short Bench. Conviction remains the same as when we added it two weeks ago, but we de-risked one of the two positive catalysts, which was ‘banker initiation day’, and was good for a nice pop in the stock. We think that you’re currently looking at peak demand, and subsequently peak margins and earnings – which are grossly unsustainable. This stock is egregiously expensive on recovery earnings, which should be about 70-80% lower vs what we see today. This call is quite simple…the company has been private for its entire life, and the PE firm that owned it since 2010 saw a unique window for an exit strategy by capitalizing on both the increase in housing turnover and the surge in demand for eating/cooking from home (particularly outdoors) that drove the category up by 40%+ over the course of COVID. That allowed the company to a) sell meaningfully more units through its wholesale and direct channels, and b) do so with little discounting driving Gross Margin from 45% to ~50%, and c) leveraging its SG&A infrastructure by taking down SG&A margins by another 300-400bps. All in, margins went from 11-12% pre-pandemic to something closer to 18-20% today. That results in about $0.75-$1.00 per share in EPS power this year. But let’s face reality…this company has 24% market share in what is usually a steady 3-5% growth category. Next year we’re likely to see the category shrink by a good 10%, and we don’t think WEBR will make up for that delta with increased market share. Ultimately, as the model quickly de-levers on more normalized top line trends, we think we’re back to 12% margins over a TAIL duration, which gets us to about $0.20 per share in sustainable earnings power (it has a staggering 287mm shares outstanding, plus a billion in debt). Yes, Weber is a great brand with dominant share and category leadership, but it’s not worth more than 20x-30x earnings – which suggests a $4-$6 stock vs its current $16. We’d actually argue a consumer durable-esque 12-15x multiple as being more realistic. We still have one near-term positive catalyst to watch out for, which is the release of the June and Sept quarters (likely at the same time) which should be the end of the topping process for the P&L. But don’t be fooled…the earnings power this company is putting up today is a mirage. Completely and utterly unsustainable. We see upside to $20 on the positive earnings catalyst, and downside to the low single digits when economic reality sets in. Once we de-risk the coming earnings reports, this name has Best Idea Short written all over it.
RVLV: Removing from Long side of our Position Monitor. The reality is that since we made the call on 11/22/20 (with the stock at $19.44) that Revolve is “the mother of all reopening plays” the name is up 210%. The performance was evenly split between multiple expansion and meaningful upwards revisions. There’s a lot of good news in this name right now, and the stock got an added pop this past week with the announcement of Kendall Jenner as the Creative Director for RVLV’s FORWARD brand. Should the company have a good holiday? Yes, certainly better than last year, but the 5x EV sales and 9x EV/Gross Profit multiples already discount that. Longer term we have concerns about the company over-assorting, and under-curating its product line – making it increasingly competitive with every other apparel retailer out there. With the multiples within striking distance of historical highs, and with short interest at historical trough (12% -- it’s been as high as 83%) we’d likely look to go the other way on this name if it has a 7-handle.
