We recently compiled a list of the 8 Best Wide Moat Stocks to Buy According to Analysts. In this article, we are going to take a look at where Etsy, Inc. (NASDAQ:ETSY) stands against the other wide moat stocks.
Undoubtedly, global and domestic investors have mastered the art of riding out the highs and lows of the US stock market. They tend to believe that fluctuations in the stock market are short-term, and should be dealt with accordingly.
McKinsey & Company highlighted that, in 2001, the market cap of the companies making up the S&P 500 stood at ~$10 trillion. As of mid-June 2022 (despite the bearish opening), S&P 500 market capitalization touched ~$32 trillion. Also, the mean total yearly returns (including dividends) of the S&P 500 between 1996 to mid-June 2022 was ~9% in nominal terms, or ~6.8% in real terms.
The investors have seen significant fluctuations. S&P 500 saw a strong decline in 2000, 2001, and 2002, with a ~37% decline in 2008 and a ~22% fall in 1H 2022. That being said, between 1996 and mid-June 2022, S&P 500 returns only declined 5 times annually. While there can be significant fluctuations in the US markets, the macroeconomic indicators can help provide a broader overview of the expected performance of equities.
US Fed Rate Cut – It Finally Happened
The decision on the rate cut by the US Federal Reserve was indeed a closely watched one. The apex bank decided to go for a larger 50-bps reduction in interest rates, instead of a more traditional 25-bps rate cut. This decision was more consequential than normal for 2 reasons. Firstly, this rate cut marked the initiation of a long-awaited easing cycle. Therefore, the US Federal Reserve shifted its focus away from the risks related to inflation and towards protecting the labor market and economic expansion.
Secondly, the rate cut decision itself was much more critical and engaging than normal. History suggests that the US Fed provides greater transparency when it comes to decision-making. This means the financial markets are not surprised by the decision as people know what the US Fed is going to do. However, the recent one was not like this, with markets pricing the 25-bps rate cut decision. The move to cut the key rates by 50 basis points should help the US Fed normalize rates more quickly and be ahead of the emergent slowness in the broader labor market. That being said, the US Fed’s forecasts (the dots) don’t reflect this pace continuing beyond September.
The recent report by Russell Investments highlighted that the company expects the US Fed to cut rates by 25 basis points at each of the remaining meetings in 2024. Furthermore, this pace should be sustained into 2025. If the trajectory continues, the US Fed will be down to the company’s expectations of the normal or equilibrium rate of interest of between 3%-3.25% by this time of the next year.
Equity Market Outlook Post Rate Cut
The implications for the rate cut onto equities hang mainly on the fundamental backdrop—i.e., corporate earnings and whether the US economy is heading for a soft or hard landing. In case of a soft landing, Russell Investments believes that the combination of lower rates and resilient fundamentals should benefit select areas of the market such as real estate and small caps. Regarding small caps, in particular, the investment firm expects a ripe environment for skilled active managers to pick quality businesses at more attractive valuations.
In the remainder of 2024 and 2025, the US Fed cuts are expected to have a positive effect on the economy and markets. Analysts at Wells Fargo believe that the global economy should also benefit, as major central banks around the world have already announced the cut rates or will be announcing soon.
Market experts believe that the Fed rate cut expectations have led to the investors rejigging their portfolios and pivoting towards public companies that are interest-rate sensitive. These include dividend companies, telecommunication giants, utilities, and REITs, among others.
Wall Street also believes that the rate cuts should help well-established and financially stable companies to increase their spending and investments, which are likely to reflect in their stock prices in the remainder of 2024 and early 2025.
Our methodology
To list the 8 Best Wide Moat Stocks to Buy According to Analysts, we conducted an extensive online search and sifted through online rankings and VanEck Morningstar Wide Moat ETF. Next, we considered average analysts’ price targets of the selected stocks. Finally, we ranked the stocks according to their potential upside, as of September 21. We also included the hedge fund sentiment around these stocks, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A young woman shopping for a vintage fashion item online.
Etsy, Inc. (NASDAQ:ETSY)
Number of Hedge Fund Holders: 36
Analysts’ Average Price Target: 18.72%
Etsy, Inc. (NASDAQ:ETSY) offers e-commerce services. It provides handmade and vintage items, art, and supplies, and regular items like clothing, housewares, paper goods, candles, and other items.
Etsy, Inc. (NASDAQ:ETSY) managed to build a marketplace spanning non-traditional, unique, customizable, and artisanal inventory, deriving a wide moat as a result of the network that grows more valuable as additional buyers and sellers join it. The company’s moat gets further strengthened by its strong position in the niche market, aided by a loyal customer and seller base. Etsy, Inc. (NASDAQ:ETSY)’s focus on improving customer experience, leveraging AI, and continuing to maintain a unique marketplace having high-quality listings should continue to support its growth trajectory.
Market experts opine that there remains a significant opportunity for Etsy, Inc. (NASDAQ:ETSY) to accelerate growth and improve margins. This momentum is expected to be supported by greater economic rents from its two-sided marketplace for artisanal goods because of healthy market share and lack of direct competition.
In 2Q 2024, Etsy, Inc. (NASDAQ:ETSY) saw its consolidated revenue coming at $647.8 million, up by 3.0% YoY, with a take rate of 22.0%. Its positive revenue increase was primarily due to growth in Marketplace revenue, mainly aided by payments revenue and transaction fee revenue from Offsite Ads. For 3Q 2024, the company expects an adjusted EBITDA margin of ~27%.
Piper Sandler reaffirmed a “Neutral” rating on the shares of Etsy, Inc. (NASDAQ:ETSY), giving a price objective of $56.00 on 23rd August.
Oakmark Funds, advised by Harris Associates, released its second quarter 2024 investor letter. Here is what the fund said:
“Etsy, Inc. (NASDAQ:ETSY) is a global marketplace for unique and creative goods that connects millions of buyers and sellers across the world. We first became interested in Etsy in 2017 when Josh Silverman took over as CEO and began transforming the company from a borderline nonprofit into a higher margin, faster-growing enterprise. The Covid-19 pandemic accelerated the company’s already strong fundamental results as millions of new customers flocked to the platform, but like many other Covid-19 beneficiaries, Etsy has since fallen deeply out of favor. In our view, investors today are too focused on the timing of Etsy’s return to growth and are ignoring the company’s positive long-term outlook. We believe the macro environment for Etsy’s product categories will eventually improve and Etsy is poised to benefit. At the same time, we believe Etsy’s continued push into international markets can provide a solid source of revenue growth for the long-term. After the recent sell-off, we were able to purchase shares at a discount to our estimate of intrinsic value.”
Overall ETSY ranks 3rd on our list of the best wide moat stocks to buy according to analysts. While we acknowledge the potential of ETSY as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than ETSY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.