Here’s Why Etsy Management Is Investing $1 Billion in Buybacks

Key Points

• After trading down to 59% of its 52-week high, Etsy stock now seems cheap enough for insiders to start buying, this time approving up to $1 billion in buybacks.
• Institutional buyers like the stock's value just as much, as there have been recent buyers.
• Despite underperforming for the year, Wall Street analysts still see enough financial evidence to keep double-digit upside projections on Etsy.

When investors think of how they will eventually get their returns from a stock investment, they typically relate to the classic “Buy low, sell high” strategy. Another common way of looking at this is through dividend payouts, as the quarterly (sometimes monthly) income gives shareholders a sense of comfort and achievement.

However, dividends are paid with company profits, which are taxed at the business’s corporate tax level. Investors then pay a second tax layer on their dividend income, which few might consider when investing in dividend stocks. Thus, dividend stocks may not be an efficient choice from a tax perspective.

Stock buybacks, on the other hand, let investors boost their ownership in a company at no extra cost, which also boosts their long-term returns while eliminating the additional tax layer. This is why investors should pay attention to the $1 billion stock buyback program now approved for Etsy Inc. NASDAQ: ETSY. Here are some reasons insiders think the stock is cheap enough to buy today.

Wall Street and the Market Know Etsy Stock’s Value Is Much Higher

Even though the stock has sold off to a mere 59% of its 52-week high, the bearish momentum failed to scare Wall Street analysts away. Investors need to keep in mind that analysts will very rarely risk their necks (and reputations) on a stock, so being bullish on a beaten-down stock means a lot more today.

Those at Truist Financial particularly see a $70 price target for Etsy stock today and a Buy rating. This valuation would call for a net upside of 32% from where the company trades today, not to mention making a new high after trading in a channel for the past month.

The earnings per share (EPS) growth forecast backs these valuations. It has Etsy reporting up to $0.54 in earnings over the next 12 months, compared to today’s quarterly $0.45. This jump of 20% justifies double-digit rallies in the stock’s price, if not more.

Then there’s the institutional buying. ICICI Prudential Asset Management decided to boost their holdings in Etsy stock by as much as 7.8% as of November 2024. This new allocation brought their net position to a high of $8.4 million today, showing further bullish sentiment on Etsy stock right now.

Why Etsy Stock Commands a Premium in Today’s Market

On a price-to-earnings (P/E) basis, Etsy stock commands a significant premium to the rest of the business services sector. By trading at a rich 27.3x P/E multiple today, Etsy stock calls for a 40% premium compared to the business services sector’s 19.5x average P/E valuation.

Some investors would see this as expensive and potentially overextended. However, there are always good and justifiable reasons for a stock to command a premium to the rest of its peer group. Investors can already justify some of these reasons through analyst sentiment and institutional buying.

Another, probably less known, reason for management to be bullish on their own stock is found in the company’s financials. The latest quarterly earnings results show an essential divergence between reported net income and operating cash flows.

Whenever these two diverge, especially in favor of operating cash flows, it typically means the actual earning power of the business in question was much better than what a lower net income would suggest. This is the case for Etsy today, as the company reported only $173.3 million of net income, a decline of 23% from the $224.3 million generated over the same quarter last year.

Then, investors can see that Etsy reported up to $437.5 million in operating cash flows. This figure is not only much bigger than net income but also a wide improvement from the $410.4 million reported a year ago. A jump of 6.6% over the year in true earning power doesn’t justify the company's being down to only 59% of its 52-week high.

Analysts know this, which is also why management approved allocating up to $1 billion to buy back shares of the stock today. When it comes to volume, Etsy also slowly but surely shows further interest from the broader market.

Etsy saw up to 4.3 million shares traded on the day after the election, while its average volume is a lower 3.7 million; considering the stock edged higher that same day, it would be safe for investors to assume that this spike in volume came from other willing buyers in the market.