Oh My, What's Going on at Etsy?

Maybe Etsy (NASDAQ: ETSY) thought investors would be understanding when it reported a bad quarterly miss, the departure of its CEO and CTO, the layoff of 8% of its workforce, and a review of growth estimates by its board of directors all in the same day. Etsy thought wrong.

Shares in retreat 2.0

Since reporting its first quarter results on May 2, shares of the online marketplace have retreated back to around $11 a share, erasing some of the rebound that was under way after a not-so-great fourth quarter and end-of-year report a few months ago. The much maligned company is beginning to look like it will repeat the performance it posted last year after disappointing shareholders too many times.

Data by YCharts.

Since becoming a public company in early 2015, revenue has nearly doubled. Profitability is non-existent, but has been generally trending better since the initial drop post-IPO.

Data by YCharts.

With things generally looking better at Etsy than a couple of years ago, why the slew of disruptive bad news and the negative reaction from Wall Street?

Image source: Etsy.

Punishment for overpromising and under delivering

Etsy missed its own internal expectations to kick off the year. In the last quarter, gross merchandise sales and total revenue increased 14.2% and 18.4%, respectively. In its outlook for the year, management was aiming for 15-17% gross merchandise and 20-22% total revenue increases. That's not the worst miss the world has ever seen, but not a great start to the year.

The company also missed bottom line analyst profit estimates of $0.01 per share, delivering a $421,000 loss. That follows up the big end-of-2016 loss of $0.19 per share compared with consensus estimates of a $0.02 profit.

In a conciliatory statement, former CEO Chad Dickerson had this to say about the changes:

Last fall Etsy purchased a machine learning start-up to help improve site search functionality. Perhaps leadership was unhappy with that move, or wanted more of it, as it was announced Chief Technology Officer John Allspaw is also departing. That follows up the hiring of new Chief Financial Officer Rachel Glaser last month. The new leadership team is tasked with transitioning the business to its next phase of growth, which includes cost cutting (thus the 8% workforce slim down), and the board is doing a review of management's 2017 estimates.

What to do next?

The storm of issues surrounding Etsy is the kind of disastrous news that makes value investors salivate.

Yes, the company has a lot to figure out, but the market tends to overreact and the stock could be worth keeping an eye on. The company's revenue is still growing by double digits despite the deceptively bad stock performance as of late.

In the meantime, the market has volleyed the ball back into Etsy's court. The new leadership will take some time to learn the ropes and plans to give a revised outlook during its second quarter report in a few months from now. I for one will be waiting for that direction before scooping up any shares.

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