Morgan Stanley Acknowledges Bearish Thesis On Etsy Was Wrong

Morgan Stanley's bearish stance on Etsy Inc ETSY was based on low expectations for the e-commerce platform to turn around its business -- a thesis the research firm says has now been proven wrong.

The Analyst

Morgan Stanley's Brian Nowak upgraded Etsy from Underweight to Equal-Weight with a price target lifted from $36 to $48.

The Thesis

Etsy's turnaround dates back to the middle of 2017 when improving user trends prompted a better than expected gross merchandise sales (GMS), revenue, and EBITDA, Nowak said in the note. There are three reasons to suggest the momentum will carry forward through at least 2020.

• Etsy lifted its seller service fee in July from 3.5 percent to 5 percent and the importance of this move was misunderstood, Nowak said. The service fee will also apply to shipping costs, which should translate to an incremental 100 basis points to the total commission rate the company collects.
• Etsy's new seller subscription service that was also rolled out in July should generate an incremental $9 million to 2019 gross profit based on the assumption that only 3.5 percent of all sellers sign up.
• Etsy's referral agreement with DaWanda, a Europe-based online craft website, should add an extra $22 million to 2019 gross profit. Etsy paid $35 million to DaWanda to encourage its buyers and sellers to migrate to Etsy's platform as DaWanda planned to close its business. The deal could be seen as a strategy for Etsy to acquire DaWanda's buyers and sellers.

Price Action

Shares of Etsy closed Tuesday at $42.67.

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