On Thursday, Morgan Stanley (NYSE:MS) issued a downgrade for Etsy (NASDAQ:ETSY), shifting the stock's rating from Equalweight to Underweight. The firm also reduced its price target on the shares to $55 from the previous $64. The downgrade is driven by concerns over Etsy's growth prospects following its significant expansion during the COVID-19 pandemic.
Morgan Stanley suggests that Etsy has reached a new level of market saturation, which could hinder its medium-term Gross Merchandise Sales (GMS) growth and valuation multiples. Despite Etsy's ability to retain much of its gains from the pandemic, with GMS up approximately 165% since 2019, the firm believes that the online marketplace is now closer to saturation in its primary markets, making it challenging to add new user cohorts.
The analysis by Morgan Stanley highlights a decline in core GMS by 5% on a two-year year-over-year basis, with the total GMS from past buyers remaining essentially unchanged. This slowdown is partly attributed to a 7% decrease in GMS per buyer over the same period, affected by a difficult macroeconomic environment for discretionary spending.
Looking ahead, Morgan Stanley anticipates a modest GMS Compound Annual Growth Rate (CAGR) of around 3% from 2023 to 2026, with estimates for 2025 and 2026 GMS falling below the consensus. The firm points out a potential trade-off between GMS growth and profitability, as most of the expected growth is likely to stem from buyer growth driven by marketing efforts.
The report also notes that while generative AI search technology could potentially improve purchase frequency on Etsy, the uncertainty surrounding the timing and benefits of such technology makes it difficult to factor into current valuations.
Morgan Stanley concludes that Etsy's valuation may align more closely with that of eBay (NASDAQ:EBAY) as the market becomes more aware of Etsy's medium-term growth trajectory. The new price target of $55 implies a reduction in Etsy's trading multiple to 9 times its projected 2025 EBITDA, representing a 20% downside from its current level.
InvestingPro Insights
In light of Morgan Stanley's downgrade of Etsy, a closer look at some key financial metrics and InvestingPro Tips provides a more nuanced picture of the company's current status. Etsy's impressive gross profit margin stands at 70.05% for the last twelve months as of Q4 2023, a testament to the company's ability to maintain high levels of profitability despite market challenges. Additionally, the company's P/E ratio has adjusted to a more attractive level of 20.39, suggesting that the stock may be trading at a low price relative to near-term earnings growth.
InvestingPro Tips also indicate that Etsy has been proactive in its capital management, with aggressive share buybacks signaling management's confidence in the company's value. Moreover, analysts predict that Etsy will remain profitable this year, which is corroborated by the company's profitability over the last twelve months.
For investors looking for a deeper dive into Etsy's financial health and future prospects, there are an additional 10 InvestingPro Tips available. These tips offer insights that could help in making a more informed decision, especially when considering the current market sentiment reflected in Morgan Stanley's report. To explore these insights further, consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
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