Morgan Stanley analysts cut the firm's price target on Etsy (NASDAQ:ETSY) to $74 from $79 per share in a note Tuesday, maintaining an Equal-Weight rating.
The analysts told investors that Etsy.com's cohort dynamics have "degraded meaningfully." After COVID pulled forward years of customer growth, they stated that there has been significant debate on ETSY's go forward growth algorithm.
"Key to GMS growth is the ability to profitably acquire customers at its now larger scale. Our new LTV/CAC model shows ETSY is hitting limits on its ability to profitably add larger cohorts," the analysts wrote. "We estimate ETSY's 5-year LTV/CAC has nearly halved from 3.5x in 2018 to 1.9x in 2022."
"Adjusting out the COVID benefit, we estimate Etsy.com's 5-year LTV/CAC has declined ~30% from 2.6x in 2018 to 1.9x in 2022 largely due to a quickly inflating CAC," they added. "We believe this demonstrates the COVID pull-forward captured much of the low-CAC demand available, making incremental GMS growth increasingly expensive."
As a result, the analysts said material GMS growth and EBITDA margin expansion are unlikely to happen in tandem.
"From here, we believe ETSY faces a difficult trade-off between increasing CAC to maintain GMS growth or accepting lower growth with a stable CAC," wrote the analysts.