ETSY (NASDAQ: ETSY) Stock Getting Ahead of Itself on Face Mask Sales

E-commerce stocks are arguably seeing a 1999-like bubble as the COVID-10 pandemic has bestowed a halo effect on companies with frictionless transactions coupled with a network effect. Online marketplace Etsy, Inc. NASDAQ: ETSY enables individuals and businesses to auction, buy and sell unique customized products and services. The products are usually non-essential discretionary items often made by individuals ranging from crafts, artwork to clothing, and furniture. The novel coronavirus pandemic selling that commenced in mid-February caused Etsy shares to slide with the S&P 500 index NYSEARCA: SPY losing half its value before rebounding into last week of March 2020. Shares have nearly doubled the pre-COVID-19 highs riding the e-commerce momentum wave. Investors may find it prudent to consider taking some profits during the parabolic rise before the pullback to reality, especially when the sharp growth spike can be attributed to a temporary global supply shortage and demand shock for face masks in April 2020.  

Q1 2020 Earnings Release

On May 6, 2020, Etsy released Q1 2020 results for the quarter ending in March 31, 2020. The Company reported a non-GAPP earnings of $0.10 per share, missing analyst estimates of $0.25 per share by (-$0.15). Revenues rose 34.7% year-over-year (YoY) to $228.05 million beating consensus analyst estimates of $219.34 million. Active buyers grew 16% YoY and active sellers grew 26.4% YoY. The Company stated that business stabilized by the end of March as April saw sales momentum accelerate dramatically. Etsy increased forecasts for Q2 2020 revenues to $310 million to $340 million verse $207.84 million consensus analyst estimates. The Company expects gross merchandise sales (GMS) YoY growth of 80% to 100%. However, this extraordinary revenue spike can be attributed to a temporary demand spike and supply shortage of a single item category at the right moment in time, face masks.

Face Masks Driving Growth

Management emphasized in the conference call that April was an “extraordinary month… very, very big and extraordinary very unusual.” The Company saw massive global demand for fabric face masks to stem COVID-19 spread resulting in $133 million of sales in April. The Etsy marketplace also saw 79% YoY growth. There are over 60,000 sellers making and selling masks. The Company recruited mask makers to meet the demand as over 12 million face masks were sold in the month of April. However, even management isn’t convinced that masks will be “an enduring category for months”. As the global supply of face masks improve, Etsy should see a significant slowdown from this category that investors may not be factoring in. This surprise upside forecast accelerated shares through the pre-COVID 19 highs of $64.23 and set the bar high.

Hobby Versus Business

Investors are comparing Etsy to a Shopify, Inc. NASDAQ: SHOP for empowering individuals to operate as small businesses with a complete turnkey storefront infrastructure. However, Etsy products are unique and sold by independent sellers who tend to be hobbyists. This can be rather inconsistent. When items are unique, they tend to have little resale value. There is a reason by the IRS makes a distinction between a “hobby” and a “business”. Etsy started as a novelty and niche-oriented site that got swept up with the e-commerce momentum wave. The single category driver for Etsy was the demand for face masks at the peak of the COVID-19 pandemic. If toilet paper was also a product that individuals made, that would have driven even greater sales. The problem is that the supply shock has been rectified as mass face mask production has restored global supplies. This will cause elevated prices to fall as well as demand to wane. This is why Esty stock is getting ahead of itself. Prudent investors may want to unwind positions into trajectory levels ahead of Q2 2020 earnings at the end of July 2020.

ETSY Price Trajectories

Using the rifle charts on monthly, weekly and daily time frames provides a broader view of the landscape for UPWK stock. The weekly market structure low (MSL) triggered above $40.32 as the bullish stochastic mini pup oscillation drove shares up to $65.59 Fibonacci (fib) level. Shares broke out through the pre-COVID-19 highs on the heels of the Q1 2020 earnings release and raised guidance. The e-commerce wave naturally added more wind to the sails launching shares to the monthly upper Bollinger Bands at $111.42. The weekly pup breakout and daily mini pup breakout provide upside trajectories to the  $115.09 fib, $118.19 daily upper BB fibs and $123.46 weekly upper BBs. Investors may want to consider unwinding positions or taking profits at these trajectory levels while the e-commerce still has liquidity. Nimble seasoned traders can use the fib levels to consider selling shares with trail stops in place.