Etsy Stock Will Continue to Disappoint Investors in 2017

Etsy Inc. (ETSY) stock is on a downward spiral on Wednesday, as the company’s stock fell more than 7% on the news that CEO Chad Dickerson will step down from his position. The news sent the company’s stock down as much as 14% on Tuesday followed by a rough day on Wednesday.

The company put Josh Silverman, who joined the company’s board in November, in Dickerson’s place.

Etsy’s CEO “stepped down” from his position after the company’s revenue came up short of Wall Street expectations, with $96.9 million in revenue. Dickerson will stay on with the company in an advisory role to help the transition.

Matters got worse for the company, as they’ll lose chief technology officer John Allspaw as well.

Investors have reason to worry about Etsy. There’s a lot investors can learn from the company since they’ve went public.

A Dream IPO Ends Badly

Etsy’s IPO price was $16 a share, with the company valued around $1.8 billion. The company’s inflated value was over 9 times the previous year’s sales of $196 million. The company also lost $15 million and had $128 million in expenses (and growing) the year before the IPO.

The honeymoon helped push the stock up to nearly $28 a share, and it now sits at $10.50 a share.

Initial investors have lost out majorly with their bet on Etsy, and we expect the trend to continue through 2017 at the least.

Major Changes May Stall Growth

Etsy plans to reduce their workforce by 8%, and they’ve also made major changes in their management. Management changes are never easy for a struggling company, and this data alone points to a difficult year for the marketplace.

The company had a solid Q3 2017 with a major rise in revenue (33%), and they even raised their full-year guidance.

But the company’s revenue shines a light on a growing problem: The marketplace relies on seller services for more than 50% of their revenue. The services offer help to sellers to grow and manage their businesses.

The company’s revenue will struggle if sellers begin to abandon the platform, which hasn’t happened yet. The company boasts 1.7 million sellers, which is a healthy amount. The problem is that the company can’t seem to reduce its costs.

Solid growth in revenue isn’t enough to keep the company’s stock stable.

The company’s Q4 2016 loss was greater than expected, as operating expenses grew to 63.3% of revenue. Employee-based acquisitions were to blame, but the company’s failure to lower expenses will hurt them for the remainder of the year.

Operating expenses in Q1 2017 grew by 36.4% year-over-year, while revenue grew by only 18.4% during the same time period.

The 12-year-old company maintains a unique business model and does have fundamental strengths. The 8% reduction in staff is a sign of lowering operating expenses in the long-term, but the company will need to work hard to regain investor confidence.

The company is likely to fall short of their full-year outlook, and they announced plans to revise their guidance after second-quarter results.

With nearly half the year behind the company, it’s safe to say that Etsy’s guidance will be revised lower.

Etsy’s stock may fall as low as $9 before an expected rebound. The company’s plan to reduce 80 jobs from its workforce may not provide enough cost cutting to put the company back on track for profitability. Black-and-White Capital suggests the company seek strategic alternatives, with the potential of a sale on the table. The hedge fund owns a 2% stake in Etsy.

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