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Shares of Etsy (ETSY -5.20%) are tumbling today, down by 7% as of 3 p.m. ET, compared to a 2.6% slump in the S&P 500. That drop added to significant short-term losses for the e-commerce specialist, which has fallen over 40% since the start of 2022.
Thursday’s decline came as investors grew more worried about the prospects of a recession ahead.
Ironically, those worries were sparked on a day that brought several pieces of positive economic news. Fresh government statistics pointed to a robust jobs market and strong economic growth in the third quarter.
That news, paradoxically, had Wall Street feeling pessimistic. Investors are concerned that the Federal Reserve will have to continue raising interest rates at an aggressive pace in 2023 to combat inflation. Etsy fell along with many of its tech stock peers due to those fears.
To be sure, Etsy’s business has already seen stress from slowing consumer spending. Executives in early November cited “pressures on consumer discretionary spending” as a key reason why revenue rose just 11% through late September. Most Wall Street pros are looking for a further slowdown in the current period, with sales likely rising 4% in Q4.
Etsy’s business would be hurt by a recession over the short term, along with many other consumer discretionary stocks. But a cyclical downturn doesn’t threaten the investing thesis for this business. To judge Etsy’s wider prospects, follow trends like growth in the buyer pool and in the company’s take rate (the fees it charges sellers).
Etsy has been outshining peers like eBay on these metrics in 2022, and that success implies valuable competitive assets for its merchandise platform.
While its sales and earnings trends might be impaired by a further consumer spending slowdown, Etsy shareholders have a good shot at seeing market-beating returns if they focus on holding the stock through this period of elevated volatility.
Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Etsy. The Motley Fool recommends eBay and recommends the following options: short January 2023 $45 calls on eBay. The Motley Fool has a disclosure policy.
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