Will Etsy Stock Recover in 2016?

Will Etsy stock recover in 2016?

etsy-stock-graphThat's been the question on investors' minds recently as shares of the artisan marketplace crater to new lows. Etsy Inc. (Nasdaq: ETSY) stock has plummeted 70.3% during its seven-month run as a public company. It's down 20.3% in the last month alone.

The Etsy stock price has been plagued by three consecutive quarterly losses. Last quarter, the company posted a loss of $0.06 per share on revenue of $65.7 million. During Q1 and Q2, Etsy lost $0.84 per share and $0.07 per share, respectively.

The stock is also being destroyed by its biggest competitor - Amazon.com Inc. (Nasdaq: AMZN).

On Oct. 8, Amazon launched "Handmade," its own online marketplace for artisan goods. According to Forbes, about 80,000 items from 5,000 sellers in 60 different countries went live on Handmade on the first day.

With Handmade, Amazon has clearly developed an "Etsy killer." After all, Amazon's 278 million active users dwarf Etsy's 21 million users. That means the Etsy stock price could keep falling if Handmade's early success continues.

But Etsy has ambitious plans to grow beyond its marketplace service...

The company recently launched the beta version of Etsy Manufacturing, which matches sellers with small manufacturers. About 600 manufacturers have applied for the service so far, and Etsy believes it will help sellers expand their small businesses. Revenue will come from transaction fees charged to both designers and manufacturers once the service rolls out next year.

The company hopes revenue from Etsy Manufacturing will bring much-needed earnings growth.

With another revenue stream on the horizon, investors are wondering if Etsy's currently discounted price of $8.91 offers the opportunity to buy into a 2016 rebound - but here's why we're not buying.

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Will Etsy Stock Recover Next Year?

There are two reasons why Etsy stock won't recover in 2016. The first is the company's lack of profitability.

Etsy's operating expenses have skyrocketed over the last two years. They increased 81.4% in 2013 and 67.6% in 2014. Although the company is slowly cutting costs, the operating expenses of $43.2 million in the third quarter alone show the company is still a long way from turning a profit.

In fact, the company even admitted in its IPO filing it may never turn a profit.

"We expect that our operating expenses will increase substantially as we hire additional employees and increase our marketing efforts," the Etsy IPO filing stated. "We may not achieve or maintain profitability in the future."

The second reason why the Etsy stock price won't recover next year is the company's lack of concern over its lack of profitability. That stems from Etsy's B Corp. certification.

B Corp. certifications are awarded by B Lab, a nonprofit that, according to its website, "uses the power of business to solve social and environmental problems." They're given to companies meeting various social, environmental, transparency, and accountability standards. Some B Corp. initiatives include providing employees bikes for their commute and composting for food waste.

But these values threaten Etsy's ability to turn a profit. That's because the company prioritizes shareholder and community well-being over the success of Etsy stock.

Etsy wants investors to embrace its mission to be both socially conscious and financially successful. That's a pretty tall order on Wall Street.

"It's like a beautiful test in a way to see if it's possible to have a mission beyond money," said Rett Wallace, CEO of Triton Research, to Bloomberg. "You see these situations all the time where even management is doing their best to take every penny off the table... you often see fund managers saying, 'You're not doing enough to make money.'"

The Bottom Line: As Etsy continues to fall to new lows, investors keep asking, "Will Etsy stock recover in 2016?" With a series of rough earnings reports and no profits in sight, it's clear the Etsy stock price will continue to suffer over the long term. We advise against buying Etsy stock.

Alex McGuire is an associate editor for Money Morning. Follow him on Twitter at @AlexMcGuire92.

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