Can Etsy Stock Bounce Back After Last Week's 20% Drop?

By Rick Munarriz Markets Fool.com

It was a rough week for Etsy (NASDAQ: ETSY) investors. Shares of the arts and crafts marketplace plunged 19.9% after the company posted mixed quarterly results. An analyst would go on to downgrade the stock following the report.

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Revenue climbed 25% to $110.7 million in Etsy's fourth quarter. Analysts were only holding out for $107.8 million in revenue. Etsy is in the process of expanding beyond its flagship marketplace, a move that's paying off with growth-enhancing results. Markets revenue grew 18%, but it was Etsy's seller services category -- up 31% on the strength of its Direct Checkout platform -- that's keeping overall growth north of 25%. Things could get even better next month when Etsy rolls out a marketplace for arts and craft supplies.

Things didn't work out as well on Etsy's bottom line. Operating expenses rose 42% -- faster than Etsy's top line -- denying the dot-com speedster the fruits of its model's scalability. Etsy's expenses surged as a result of employee-related expenses following its Blackbird Technologies buyout and the launch of its first-ever global brand campaign.

Etsy wound up posting a quarterly loss of $0.19 a share. Wall Street pros were holding out for a small profit. There were some one-time items weighing on the bottom line, but Etsy still would've served up an unwelcome deficit.

Image source: Etsy.

Getting crafty

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Wall Street clearly wasn't impressed.Monness Crespi downgraded Etsy from buy to neutral following the report, and we've already covered the stock shedding a fifth of its value last week.

Etsy is still doing a few things right. Growth may continue to decelerate -- it sees 20% to 22% growth this year -- but that still finds the platform gaining in popularity. There were 1.748 million active sellers on Etsy, 12% higher than a year earlier. The number of active buyers on the site has grown 19% to 24.046 million. It's great to see the number of buyers climbing at a faster pace than sellers, making the platform more lucrative for the average arts and crafts entrepreneur setting up shop on Etsy.

Etsy offers a compelling value proposition for artisans, taking a 3.5% cut of any sales and charging just $0.20 for each product listing. It will be interesting to see if April's launch of Etsy Studio -- a marketplace for arts and crafts suppliers -- moves the needle, as clearly it will have access to the ideal buyer base for supplies.

The platform may work for buyers and sellers, but it hasn't panned out for investors. Etsy went public at $16 two years ago, and it's firmly a busted IPO now. There was takeover speculation bubbling earlier this year, and with the stock lower now there's always the possibility the buzz builds again. Etsy's bottom-line miss may have been a disappointment, but last week's plunge seems more like a buying opportunity than a value trap.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Etsy. The Motley Fool has a disclosure policy.