Why Esty, Grubhub Might Be Buy The Dip Opportunities

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  • Etsy Inc ETSY shares are down 52 percent in the last six months, while GrubHub Inc GRUB shares have lost 37 percent in the same period.
  • Brean Capital’s Tom Forte reiterated Buy ratings for both the companies, with a price target of $23 for Etsy and $50 for GrubHub.
  • Forte said both companies exhibited strong fundamentals, had tolerable valuations and were poised for growth.

Analyst Tom Forte mentioned that, with the market showing signs of a rebound, investors who are more risk tolerant should purchase shares of Etsy and GrubHub. These are high quality growth stocks, and although they are not cheap, the shares are down meaningfully from their recent highs.

“Both companies have strong fundamentals, tolerable valuations, and long runways for growth,” Forte added.

Etsy: Strong Business Model

The analyst believes that Etsy’s growth and the success of its stock in the long term would be driven by efforts to “exploit its platform through its Seller Services efforts (advertising, logistics, and payments) vs. its 3.5% commission rate and $0.20 listing fees from its Marketplaces’ revenues.”

If Etsy’s business model is successful it may become the equivalent of “eBay’s Marketplaces efforts (its own Marketplaces) PLUS Google’s advertising (part of its Seller Services) PLUS Amazon’s logistics (Seller Services) PLUS PayPal’s payments (Seller Services) PLUS Wells Fargo’s small business lending (crowd funding in Seller Services),” the Brean Capital report stated.

GrubHub: Proving Itself

Forte said that there were too may discussions around stiffening competition in the online restaurant delivery category as well as around a possible deceleration in two of the company’s largest markets – Chicago and New York.

“In our view, GrubHub’s 2Q15 operating results addressed those concerns head on, as it reported significant growth in all of its markets, including Chicago and New York.” Forte also said that the online restaurant delivery model was evolving similar to the online travel market, “with room for multiple winners” as an increasing number of orders move online from offline, which currently accounts for about 95 percent of the total.

The Brean Capital report added that “unlike a number of high-multiple Internet stocks,” both Etsy and GrubHub were already generating impressive adjusted EBITDA margins.

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Posted In: Analyst ColorReiterationAnalyst RatingsBrean Capital
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