Etsy Investors: Morgan Stanley Just Initiated Coverage

In a report published Monday, Morgan Stanley analysts initiated coverage of Etsy Inc ETSY with an Equal-Weight rating and a price target of $20. Etsy is well positioned to make a mark for itself in the $34 billion Handmade US market. "We see ample room for Etsy to grow in its core unique and handmade craft offering, as there is $34bn spent per year in the category domestically," the analysts mentioned. Etsy currently constitutes only about four percent of the handmade segment. "We see Etsy delivering 25% forward global gross merchandise sales (GMS) growth through 2018, even then only growing to ~7% of total category spend. Further, as the user base matures we see Etsy's addressable market expanding to even more of the total $1tn U.S. and $2tn global retail spend on Garden/Home, Arts, Crafts, and Furniture," the analysts added. Although Etsy's evolving revenue mix is likely to restrict the company's gross margins in the near future, they are expected to stabilize at around 60 percent. "Our bottom-up gross margin analysis shows how long-term margins can stabilize at ~60% (vs 63% in '14) even including a 470bp "gross margin buffer" in 2018 for potential new, lower margin seller services," the report mentioned. Etsy's ad spend is expected to help the company expand its buyer base and boost gross margin growth. Etsy's current stock valuation fully reflects the company's growth prospects.