Wedbush Initiates Coveage on Upcoming IPO Etsy (ETSY) with Neutral Rating

Wedbush analyst Gil Luria initiated coverage on upcoming IPO Etsy (NASDAQ: ETSY) with a Neutral rating and a price target of $14.00.

"We expect Etsy to enjoy rapid near-term growth rates within its niche as marketing spend helps drive penetration," Luria said. "However, we believe some seller practices may draw scrutiny, eventually limiting volume growth."

He added, "We believe Etsy benefits from the difference in what individuals expect to receive for their work time versus their free time, as well as the lack of overhead, resulting in lower prices when compared to similar goods on competing e-commerce outlets. However, we believe this arbitrage is only possible in limited categories of goods, thus capping Etsy's ultimate growth"

The firm said the recent growth in Gross Merchandise Sales is a result of International growth (now 31% of total revenue) and policy changes to allow manufactured items. In addition, they expect to see a marketing benefit from the coverage of the IPO itself as did Alibaba.

"Seller Services revenue as a percentage of total revenue has increased over the last eight quarters from 31% to 47% as Etsy added additional services," Luria commented. "We believe the company will need to add new seller services in order to sustain current growth rates."

The analyst believes the company may see increased scrutiny over some seller practices, which could impact growth. "We have identified several examples of sellers sourcing from Alibaba (contrary to Etsy guidelines and sometimes at markups exceeding 30,000%) and possible trademark infringement," he said.

The firm's $14 price target is based on a 23x multiple on FY16 EBITDA estimate, in line with closest comparable Alibaba, given similar growth trajectories.

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