Monness, Crespi, Hardt Starts Etsy (ETSY) at Sell; Analyst Highlights Potential Risks

(Updated - October 12, 2015 3:24 PM EDT)

Monness, Crespi, Hardt initiated coverage on Etsy (NASDAQ: ETSY) with a Sell rating and a price target of $10. Analyst James Cakmak said he is a fan of the Etsy story, but he sees increased risk from marketing, gross margin, competition, lock-up expiration, and valuation. Cakmak also models below consensus revenue and EBITDA.

Cakmak explained, "Specifically, we see several areas that are important to keep in mind: (1) marketing – the cost of acquiring buyers is rising, and as marketing spend edges higher, it may have to climb at a faster rate than expected in order to re-accelerate growth in buyers; (2) gross margin – the gross margin has enjoyed tailwinds from favorable economics associated with faster growing products, but the introduction of new services may place downward pressure not factored into models today;"

The analyst continued, "(3) competition – this is a lucrative space, and lucrative to the point where Amazon is officially now in the mix. Growing mind and wallet share may be more difficult than prior; (4) lock-up expiration – three phases of lock-ups are slated to expire between October 2015 and April 2016 representing about 90% of the outstanding shares; and (5) valuation – Etsy trades at a premium to the peer group despite similar growth and profitability rates."

Cakmak added, "Given the aforementioned potential risks, our model takes a more cautious stance versus the Street throughout our projection horizon. Near-term we are closer to consensus, but begin to diverge more significantly in 2016 and beyond. For 2015, we project revenue of $271MM (versus $274MM) and EBITDA of $27MM (versus $28MM); for 2016, we estimate revenue of $344MM (versus $355MM) and EBITDA of $30MM (versus $40MM). Note our model does not include gross margin implications from new services, and hence estimates it to remain in the 66%-range."

For an analyst ratings summary and ratings history on Etsy click here. For more ratings news on Etsy click here.

Shares of Etsy closed at $13.86 yesterday.

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