Etsy - A Nonsense Name - Is this the "Right Time" to Buy an IPO?
This company that originally provided an outlet for craftsmen and women to sell one-of-a-kind hand crafted items via the internet first got my attention on a 60 minute special. I was underwhelmed at that time but when it came up in one of my regular screens, I decided to a look at them as a possible investment or trading opportunity.
I screened for mid-market companies with average trading volume of over one million shares and a “white maribozu” candlestick. At the time I was drilling down into the Master Swing Trader and Candlestick Charting Explained and was curious to see if any company popped out from my normal screen using various candlestick patterns.
The pattern I was reading about is called the “Kicking Pattern” and is described as a “black maribozu” followed by a “white maribozu” with a distinct gap in between. This sounded promising so I applied it to my standard screen and out popped only one stock – ETSY!
Multiple Variations of Screening Yielding Good Results to Date
BTW, I really like the flexibility that FINVIZ offers with their free screening tools. I can screen by all the obvious things but also have multiple options I was unable to find in combination at any other location. For example, after I set my normal stuff, I can play around with:
- Every fundamental you can imagine (EPS, margins, P/E, PEG, etc.)
- Multiple variations of moving averages
- Volatility levels, gaps, change from open,
- Various candlesticks, patterns and RSI
I am admittedly a screening junkie and like to try lots of different combinations that yield different results, save them and then test to see how they do at picking winners.
As a prime example of how screening can yield good results, JMEI came out of one of these screening expeditions and yielded me a very nice scalping return. In less than ten days it went from my purchase price of $21.75 to today’s high of just over $23.50 I sold it a bit earlier than I maybe should have, but still chalked up a better than 2% return which was my objective.
Etsy a White Maribozu Screening Result
So back to ETSY and the due diligence. Part of my overall due diligence is reading everything I can get my hands on right now about technical trading and I am combining that with my understanding of fundamental trading to develop my own trading strategy.
Etsy provides a Peer to Peer (P2P) ecommerce website that charges a transaction fee for matching buyers with sellers in the same fashion that Amazon and E-Bay have been doing for many years. What makes them different?
Strike One – Changing the Business Model
The original company profile of ETSY described them as a “middle man” between purveyors of unique and/or crafted or vintage items and discretionary buyers who want something nobody else. Sounds interesting enough, but following their Initial Public Offering on April 16, 2015 Robert Kalin, one of the founders, revealed that they intend to “branch into more products to appeal to a wider range of customers,” which makes them sound very much “me to” in a marketplace that is already extremely competitive so that’s one strike against a long term hold.
Strike Two – They have yet to make a profit
The formal company profile at Ameritrade, the Company supports a range of artists, makers, designers and collectors. The Company's community is made up of entrepreneurs who sell on its platform, consumers looking to buy goods in its marketplace, manufacturers who help its sellers grow their businesses and its employees who maintain its platform.
The Company offers a range of services for its sellers, which include promoted listings, direct checkout and shipping labels. It also provides a range of tools for its buyers, including communication, search and discovery and mobile.
That all sound nice and cozy and served them well as a start-up but when they move into the big leagues, the rules will change – big time! As of the end of 2015, they have not shown a profit since opening their doors in 2005.
In 2014, they had revenues of $195 Million and a net loss of $15.2 Million. No matter how much money you bring in the door, my business training says you need to keep some of it!
Call me naïve, but I still think business is about profit and I just don’t see how this company will survive without figuring out how to make a profit. At some point along the line, the piper will need to be paid and when that day comes, ETSY will fade like the dreams of youth.
Save this and check back in five years. If ETSY is a run-away success, I’ll happily admit my mistake, but I predict they will be a victim rather than a victor sometime in the next two to three years, UNLESS they figure out how to make a substantial profit off the $274 Million raised from unsuspecting purchasers of the IPO.
Strike Three - Share Price Falling Like a Stone
Since the IPO, the price per share has fallen from a high of $31.54 on opening day to a low today of @ $22.70. Here’s a news flash and some as President Clinton would say, “Basic arithmetic” for you:
If I was silly enough to buy when the stock was “rocketing up” (see my article on pump and dumps” on the opening day at $31.54 by today I would have a paper loss of 28%! That’s math and the company better figure out how to reverse this trend and fast or they will not survive in the big bad world of global internet ecommerce.
Needless to say, this is a serious “no go” for me, but I’ve never bought an IPO in my life and never intend to start now. I get how it works. Set an artificially inflated price, drive it up to bring in the suckers who are hoping ETSY or SCHMETZY or SHMALTZY will be the next Facebook or Twitter and then move on to the next project.
And for the Bonus Round?
Oh, I almost forgot the best part, according to Mr. Kalin, he chose the name because he wanted “a nonsense word so he could build the brand from scratch,” says he, “I was watching Fellini's 8 ½ and writing down what I was hearing. In Italian, you say 'etsi' a lot. It means 'oh, yes.'(actually it's "eh, si" And in Latin, it means 'and if.'”
For me, it means, “don’t go there” even as a scalping opportunity because I would never want to hold this baby long term!