Investors assessing the e-commerce opportunity offered by Etsy (ETSY) could be getting a discount after a deep dive on earnings for the Brooklyn-based company.
Shares of Etsy slid some 10% after the market open Thursday, reflecting a reaction to a mixed earnings and modest expectations that brought the company's lofty guidance into question.
However, this could be merely a speed bump if the company's lofty targets prove achievable.
"We think the shares were weaker post-close primarily because the "raise" was not as strong as it had been in recent quarters and the company reiterated its plan to invest more aggressively on brand marketing," Deutsche Bank analyst Kunal Madhukar acknowledged. "We think this creates a buying opportunity for investors with a longer-term horizon."
He noted that the growth in e-commerce as well as the niche place that Etsy occupies, acting to insulate it somewhat from major players like Amazon (AMZN) , should provide confidence to longer-term investors.
CEO Josh Silverman explained that the company is focused on "being great at what we're great at and owning and leaning into that." He reasoned that customized, artisan products from smaller sellers take time and will be easy for them to produce and deliver just like Amazon, but that this also means Amazon cannot readily copy its product offerings.
"Sometimes special takes a little bit of time and we're not shy about that," he told analysts. "We're not trying to be exactly like Amazon, we're trying to be great at what we are."
Further, the company could have upside to shift its business model to drive further profitability, according to analysts.
"We continue to believe that Etsy is a unique asset; within its niche, there are no other eCommerce platforms that can match its scale, and at the same time, its take rate remains cheaper than eBay and Amazon despite offering its sellers better visibility and higher sales velocity," Madhukar explained.
Pound the Table
Some stock-pickers were far more emphatic.
"Etsy should be bought," Action Alerts PLUS portfolio manager Jim Cramer declared. "It is truly a remarkable company that has branched so much bigger since Josh Silverman has taken the reins two years ago."
Cramer noted that the company is in the midst of an international expansion plan that is quickly moving the company's base of revenue to nearly 50% non-U.S. and technology initiatives that should promote earnings growth in the future.
CFO Rachel Glasser highlighted "fantastic wins coming out of Eastern Europe" as a particular area of expansion.
Silverman outlined the growth ahead for the company on the earnings call Wednesday evening, highlighting the $250 billion valuation he believes the company can reach.
"We outlined 4 strategic imperatives that together define Etsy's right to win, and what we believe form the foundation to unlocking our large market opportunity, which we saw as at about $250 billion," he reminded analysts. "First, creating a best-in-class search and discovery experience; second, enabling meaningful human connections; and third, building a trusted brand all while; fourth, leveraging our vast global collection of unique items."
From a current valuation around $8 billion to $250 billion long term is no small opportunity to be sure.
Carrying Sales on the Cloud
Part of the acceleration of sales in the long term could be aided by the company's transition to better technology, highlighted by Alphabet's (GOOGL) Google Cloud.
"We believe this is an investment that will have a positive impact on gross merchandise sales growth in future years as we leverage the benefit of the Elastic Compute enabled by our cloud infrastructure," Silverman explained. "We are pleased with the progress of the cloud migration and are ahead of schedule."
He hedged this by noting that the migration is a major spending project that could be a headwind tempering the company's guidance, but should optimize sales in the long term. The full migration is expected to be completed by 2020.
"Most importantly, now that we are in the cloud, we have seen how much pent-up demand and opportunity there is to improve our machine learning capabilities," Silverman added. "We see this as a growth investment and have made a conscious choice to invest more into this opportunity."
While recognizing the short-term costs, analysts largely saw this investment as a prudent one.
"The company highlighted the Google Cloud transition is going well and ahead of schedule, although slightly more costly than anticipated due to machine learning investments, among other things," D.A. Davidson analyst Tom Forte concluded. "We see the effort or part of its overriding strategy to increase purchase frequency on its platform, which should be significant fruit in the future in the form of higher sales."
Forte set a $78 price target for shares with a "Buy" rating on the stock.
As the shares fall back to just above $60 per share, that opportunity may have gotten significantly more attractive Thursday morning.
