We added 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. Best Idea Short.
Call Details:
Date/Time: Friday September 17, 2021 at 12:30pm EDT
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Confirmation Number: 13722958
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