If you listened to our Midweek Update this week, there was a seasonality chart that Mayhem discussed. The discussion was simple, 20 years of data suggests that June is a period when volume is low and the market tends to chop sideways where the Nasdaq-100 is concerned.
Obviously, past is not always prologue but, it may be a good time to look at some companies that are still trading at overvalued levels and where we could potentially short them when the market rallies and close when the market is down.
While I have conviction in certain names to buy and hold or short and hold, but this market has been very unpredictable. So, shorter term trades could be more suitable - think a few days to a couple of weeks.
Etsy's taken quite a tumble over the last few weeks. But, I still think there's further downside in this stock. Most Street analysts are optimistic about Etsy's ability to hold on to buyer count even post the pandemic surge but, I doubt that this lasts.
Most of the items that Etsy sells are discretionary items and it's likely that the last two quarters saw an outsized level of spending. Q4 2022 had Christmas spending and Q1 2023 had two good months of spending in January and February.
Etsy's fees remain high where sellers are concerned and they are reselling stuff from China (like dropshipping) and passing them off as handmade by the sellers, at a premium. It's only a matter of time until customers catch on. Also, you can find the same items on Amazon.
The shopping experience is not all bad and there are some genuine sellers there but, many of these sellers are now moving to Instagram. I personally know people who've done that. They already have a sizable following there and it's easy enough to link their shop.
So growing the customer base by adding new customer is an issue and that has declined to low single digits. But, another issue is also retaining customers, and it would seem that Etsy has a high degree of churn when it comes to habitual buyers.
So all of this leads me to doubt the growth estimates. The Street is expecting a 5.8% growth in revenue for the June quarter and 7.24% growth for the September quarter. That is just too high.
In terms of EBITDA growth, the Street expects flat EBITDA for the June quarter and 5.9% growth for the September quarter. Again I think this is too high.
Etsy also has a significant amount of debt at 4.99x (total debt to EBITDA) but, it doesn't start to come due until 2026. However, it is convertible debt and so has a potentially dilutive effect.
The company is also richly valued at 32x EV/EBITDA (should be more like 15x), which gives me an estimated price of around $75.
While I realize that ETSY has been beaten down quite a bit, I think the market has realized that this company has been overearning and this is why I think if we see a pop back up to $90 (21-day moving average), it can very well be shorted.
None of the above is investment advice. I have no position in this company but, I may initiate a short position 3 trading days after the publication of this article.