Etsy Earnings: Shares Still Attractive After Fair Value Cut on Higher Systematic Risk

After a few quarters of commentary regarding gross merchandise sales, or GMS, sensitivity to broader consumption spending trends, it's become increasingly clear to us that wide-moat Etsy's exposure to systematic factors is higher than we'd initially contemplated. Its largest categories—home and living, jewelry and accessories, apparel, and craft supplies—are inherently discretionary, and with the past few years as a proof point (with GMS falling 5% on a three-year stacked basis), the firm appears to be quite beholden to the systematic risks that are depressing consumer spending more broadly. As such, we plan to raise our cost of equity for Etsy to 11% from 9% (as we did with narrow-moat Chewy last quarter), resulting in a valuation haircut of about 30%. All else equal, we would have lowered our $140 fair value estimate by a low-single-digit percentage, with tepid guidance and our renewed e-commerce forecast—which calls for slowing growth through 2024-25 before a return to nearly 10% annual growth in 2026-28—suggesting that pressure is likely to continue longer than we'd originally penciled in. Shares still trade at an attractive discount, particularly after a 12%-13% decline in aftermarket trading.