Time for Investors to Bail on Etsy Inc?

By Tamara WalshFool.com

Etsy made its stock market debut earlier this year to great fanfare. The stock finished its first day as a publicly traded company up 88% to $30 per share. Unfortunately, those gains were short-lived for the crafts marketplace. The stock has since plummeted more than 70% to where it trades today, below $9 per share. This downfall has earned it the title of worst initial public offering of 2015 (so far). Ouch.

If you are still an Etsy shareholder, there is a good chance you're ready to run for the exits now that e-commerce giant Amazon has released its so-called Etsy killer. However, there may be more upside ahead for the company, despite its double-digit sell-off this year.

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Does Wall Street misunderstand Etsy?It's easy to dismiss Etsy as a niche player in a massive ocean of online retailers. However, Etsy is a real business that has grown from $300 million in commerce in 2011 to around $1.9 billion last year. The online marketplace reported gross merchandise sales of $569 million during its fiscal 2015 third quarter, which was an increase of nearly 22% over the same period last year. Additionally, revenue climbed more than 37% year-over-year to $65 million for the period. This was primarily driven by a 66% spike in revenue from seller services as more sellers utilized Etsy's promoted listings option.

While those results seem encouraging, Wall Street isn't happy about mounting costs as Etsy aims to grow its business both at home and abroad. During the third quarter, for example, operating expenses ballooned 32% year-over-year to $43 million.

While mounting costs can be worrisome, investors should remember that Etsy is still tiny compared to online rivals such as Amazon and eBay . Etsy therefore needs to invest ample cash in marketing and infrastructure in order to grow its online presence in this increasingly competitive space. Importantly, Etsy's operating expenses as a percentage of revenue actually decreased slightly in the third quarter as revenue growth outpaced expenses.

Signs of an overblown sell-offWith the stock down over 20% in the past month alone, you would think Etsy was bleeding sellers or struggling to attract new shoppers. That's not the case. In fact, in the latest quarter, Etsy grew its seller base by nearly 20%, while active buyers (shoppers who have made at least one purchase with Etsy in the past year)increased 25% year-over-year.

There are also signs that Etsy has ambitions to grow beyond its niche roots. The company recently launched Etsy Manufacturing, which aims to scale Etsy's business by connecting sellers with manufacturers the company has already vetted.

Etsy manufacturers can create custom profiles. Source: Etsy

By acting as the middleman in these designer-manufacturer relationships, Etsy is digging out another potentially lucrative revenue stream. Etsy plans to begin charging both designers and manufacturers transaction fees in 2016. The company's manufacturing marketplace, as it is being called, is currently in Beta. However, the concept could lead to future earnings growth for Etsy -- thereby offering another reason the double-digit sell-off may be overblown here, particularly for long-term investors.

Living in an Amazon-driven world On top of increased spending costs, analysts also worry about Amazon being a so-called Etsy killer. Last month, Amazon launchedHandmade,a direct competitor to both eBay and Etsy that offers handcrafted items from artisans around the world. Given Amazon's 285million active users, it makes sense that Etsy and eBay should worry.

Martha Stewart has pulled her American Made store from eBay and instead opened up shop on Amazon's Handmade marketplace after a nearly two-year relationship with eBay. The do-it-yourself mogul said she made the move because of Amazon's outsized scale and customer base. Amazon's Handmade site now contains over 200,000 items -- a figure that continues to grow.

Nevertheless, Etsy and eBay both remain confident in their respective businesses. eBay sells upwards of a half a billion dollars annually in handmade merchandise, according to the company's VP for merchandising. Meanwhile, Etsy's chief executive recently told shareholders that based on conversations with the company's sellers, "we have no reason to believe that any competitors are having an impact on our seller business right now."

Source: Amazon

There is tremendous demand for handcrafted products. Ultimately, I believe this strong demand means there is plenty of room in the market for multiple players. Moreover, Etsy remains competitive with Amazon Handmade in regards to both pricing and product selections. For example, Etsy currently boasts around 36 million items on its marketplace and 1.5 million active sellers. That compares to around 200,000 products on Amazon Handmade from around 10,000 sellers. Etsy also offers sellers lower transaction fees versus Amazon, which could compel more sellers to stick with Etsy or, at the very least, to sell on both sites.

Takeaway for investorsThis is far from the end for Etsy, and with the stock trading near its all-time low today, there is a clear opportunity for investors to own a promising turnaround story. For this reason, I don't believe investors should bail on Etsy but should instead stick around for what could be a very rewarding comeback play.

The article Time for Investors to Bail on Etsy Inc? originally appeared on Fool.com.

Tamara Rutter owns shares of Amazon.com and eBay. The Motley Fool owns shares of and recommends Amazon.com and eBay. The Motley Fool owns shares of Etsy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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