Etsy Shares: A Hidden Gem with 49% Upside Potential

As an investor, you're always on the lookout for undervalued stocks with significant upside potential. Etsy, Inc. (NASDAQ:ETSY) might just be that hidden gem you've been searching for. With a current share price of $57.2, Etsy's stock appears to be trading at a 49% discount to its intrinsic value estimate, according to a discounted cash flow (DCF) analysis. Let's dive into the key assumptions behind this valuation and explore the primary drivers of Etsy's earnings growth over the next four years.

The DCF calculation for Etsy is based on two key assumptions: the discount rate and the cash flows. The discount rate used in this calculation is 8.0%, which is based on a levered beta of 1.204. Beta is a measure of a stock's volatility compared to the market as a whole, and a beta of 1.204 indicates that Etsy's stock price is expected to be 20.4% more volatile than the market average. The cash flows used in the calculation are based on the company's forecasted free cash flows (FCF) for the next ten years and a terminal value estimate.

The intrinsic value estimate of US$13b is quite sensitive to changes in these assumptions. For instance, if the discount rate were to increase to 10.0%, the intrinsic value estimate would decrease to US$9.1b, a 30% reduction. Conversely, if the discount rate were to decrease to 6.0%, the intrinsic value estimate would increase to US$16.5b, a 27% increase. Similarly, changes in the cash flow assumptions can significantly impact the intrinsic value estimate. If the FCF growth rate were to increase to 5.0%, the intrinsic value estimate would increase to US$15.4b, a 18% increase. However, if the FCF growth rate were to decrease to 1.0%, the intrinsic value estimate would decrease to US$9.2b, a 30% reduction. Therefore, it is essential to consider the sensitivity of the DCF calculation to changes in these assumptions when evaluating a company's intrinsic value.



Etsy's earnings growth over the next four years is primarily driven by the following factors:

1. Revenue Growth: Etsy's revenue has been growing consistently. In the last 12 months, the company had revenue of $2.80 billion, with a quarterly revenue growth rate of 4.10% (as of 2024-09-30). This growth is expected to continue, with an average revenue growth forecast of 6.45% over the next five years.
2. Operating Margin Improvement: Etsy's operating margin has been increasing. As of 2024-09-30, the operating margin was 13.11%, up from 12.21% in the previous quarter. This improvement in operational efficiency can lead to higher earnings.
3. Expansion into New Markets and Platforms: Etsy has been expanding its reach by acquiring and integrating new marketplaces like Reverb, Depop, and Elo7. These acquisitions can drive additional revenue and earnings growth.
4. Growth in Active Buyers and Sellers: Etsy's user base has been growing, with an increase in active buyers and sellers. As of 2024-09-30, Etsy had 96 million active buyers and 4.3 million active sellers, up from 89.3 million and 4.1 million, respectively, in the previous quarter. This growth in users can drive more transactions and revenue.

Comparing Etsy's earnings growth to the broader market, we can look at the S&P 500's earnings growth rate. According to the S&P 500 Earnings Index, the average earnings growth rate for the S&P 500 companies is around 5-10% per year. Etsy's earnings growth rate is expected to be around 6.45% over the next five years, which is in line with the broader market's growth rate. However, it's important to note that Etsy's growth rate may vary depending on various factors, such as market conditions and the company's ability to execute its growth strategies.

In conclusion, Etsy's shares appear to be trading at a significant discount to their intrinsic value estimate, with a potential upside of 49%. The company's earnings growth is driven by consistent revenue growth, improving operational efficiency, expansion into new markets, and an increasing user base. While the DCF calculation is sensitive to changes in key assumptions, the primary drivers of Etsy's earnings growth are well-supported by data and provide a compelling case for investing in the company. As an investor, it's essential to consider the sensitivity of the DCF calculation to changes in assumptions and monitor Etsy's overall financial health and growth prospects.