Morgan Stanley Downgrades Etsy, Anticipates Major Headwinds

Etsy Inc ETSY shares have yet to rebound after plunging on October’s earnings. One team of analysts isn’t hopeful for a recovery.

The Rating

Morgan Stanley analysts Lauren Cassel and Brian Nowak downgraded Etsy to Underweight and cut their price target from $52 to $38.

The Thesis

The analysts expect two major headwinds to hinder Etsy’s performance.

First, new state sales taxes could increase cart abandonment and decrease conversion. Second, Etsy has shifted its ad focus from buying Product Listing Ads to driving seller marketing-dollar investments — a strategy with longer payback time and lower efficiency.

“In addition, going forward we believe the market may be under appreciating the potential headwind from sellers pulling marketing spend as they are unable to choose where those dollars are being spent, resulting in lower ROI and conversion rates,” Cassel and Nowak wrote in a report.

These headwinds may be dulled by “free” shipping, which should lead sellers to bake shipping costs into prices and thereby inflate GMS. The analysts estimate a related 6% swell in the metric.

“Sales tax and Etsy ad headwinds could more than offset free shipping benefits,” they wrote. “A shorter holiday calendar and algorithm changes are two other 4Q risks.”

By their estimates, Etsy faces a tough year ahead.

“While we like ETSY's business model and competitive moat it has established, we now anticipate slowing core GMS growth to result in negative top-line and EBITDA revisions, likely leading to additional multiple compression,” Cassel and Nowak wrote.

Morgan Stanley sliced its fourth-quarter gross merchandise sales estimates to -4% and cut its 2020 EBITDA to 7% below consensus.

Price Action

At time of publication, Etsy's stock traded down 4.3% at $40.32 per share.

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Photo courtesy of Etsy.