Why Etsy Inc. Stock Rose 48% in July

What: Shares of handmade goods marketplace Etsy, rose 48.3% in July, according to S&P Capital IQ. data. The move constituted a turnaround from the pronounced decline that began almost as soon as the company entered the public markets in April:

ETSY data by YCharts.

So what:During an earnings conference call on July 16 after the markets closed,GoogleChief Business Officer Omid Kordestani described the company's success with the search technique of indexing. Reading through his prepared remarks, Kordestani stated that "developers like Etsy are really seeing a boost in traffic due to deep linking."

Lest we underestimate the perception that Google can exert tremendous influence over the revenues of companies large and small, Etsy's stock rose on a torrent of buy orders the next day, with volume shooting up 12-fold. The ETSY ticker would finish the trading day with a gain of nearly 31%.

Undoubtedly, part of the demand originated from short sellers frantically purchasing back shares on the open market. Here's a screenshot of Nasdaq's charting of short interest in Etsy. As you can see, short interest peaked on July 15, just a day before the Google conference call. Shares short at that point represented almost 10% of Etsy's total share float:

Source: Nasdaq.com.

Data from month-end isn't yet available, yet it's probable that short interest declined, as Etsy's stock remained buoyant for the rest of the month while shareholders reevaluated the company's prospects in light of the encouraging mention from Google.

Now what: Alas for Etsy shareholders, July's massive gains couldn't hold the line, as shares plunged approximately 34% in the three trading sessions following the company's second-quarter 2015 earnings release on August 4. Total revenue increased more than 44% over the prior-year quarter, to $61.4 million, yet net loss doubled to $6.4 million.

More troublesome than the net loss, and certainly affecting the magnitude of the sell-off, the company issued a warning that continuing U.S. dollar strength might dampen international demand for Etsy's marketplace goods, as it has in the first half of the year.

In addition, management indicated that it would spend more on marketing in absolute dollars during the thirrd quarter than either the second quarter or the prior year's third quarter. It also outlined that it would accelerate hiring in the third quarter, at again a faster pace than either the prior sequential or prior-year comparable quarters. Finally, Etsy told investors to expect slowing revenue growth in its "Promoted Listings" service, which has been a recent revenue catalyst.

It's becoming clear that despite a very visible IPO, Etsy still has to prove the long-term sustainability of its business model to shareholders. Yet despite Etsy's wild stock gyrations, it's early in the game yet. There's still plenty of time for the company to gain traction on revenue and earnings, small comfort though this may be to those who are already invested. For next quarter, shareholders should try to trace the effect of both the hiring and increased marketing spends on Etsy's near-term prospects. But don't expect the share volatility to diminish anytime soon.

The article Why Etsy Inc. Stock Rose 48% in July originally appeared on Fool.com.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Google (A and C shares). 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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