Introduction
Most practitioners in the industry use three main valuation methods to value the company. The methods include the comparable company analysis, precedent transactions, and Discounted Cash Flows. For this write-up, the discounted cash flow was adopted since it allows investments to be represented as a single figure, that is, the corresponding of its monitorial worth. Current share prices were compared to share values obtained from analysis of Etsy, Inc. (ETSY) shares. Among the threats identified facing the company includes the sale of fake goods on the site, loss of money through investments, fierce competition and transition from personal accounts to PayPal. The stock from ETSY is the best for buying since the company is growing very fast as indicated by the P/E ratio.
Discounted Cash Flow
The cash flow is customarily projected to determine the amounts that are expected to be produced for the first year progressing. Then each year’s estimated cash flow is discounted to the current value ( Keller, & Pastusiak, 2016) . Thus;
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Where: CF = Cash Flow
R = discount rate (WACC)
The Discounted cash flow is the most accurate and reliable method of arriving at investment evaluations; thus it’s appropriate for the selection of investment portfolios that yield extreme values. However, the DCF is vulnerable to errors if the data entered is incorrect. The WACC or the Weighted Average Cost of Capital can be used to evaluate projects that the company is engaged ( Patel, 2018) . However, the WACC is the mean cost that ETSY will have to pay for capital if it has plans of borrowing or selling equity.
Comparison of Current Share Price with Analysis Values
Etsy's current share price, P/E and EPS
The most popular method used to arrive at the stock price is by using the P/E Ratio, thus:
Intrinsic Value = P/E Ratio X Earnings per share
= 118.15 X 0.61
= 72.0715
The current share price is 71.74 compared to 72.0715 share values analyzed; thus the higher P/E ratios indicate that the company is rapidly growing. If the figures were less than the current shares, then that could be an indicator that the company has matured; hence it’s undergoing slow business growth.
Threats Facing ETSY
The first real threat that the company was facing was the loss of money through unfavorable currency exchange rates and its corporate restructuring process. In 2015, the company showed a loss of $36.5 million in one quarter in comparison to 2014 when the loss was a mere $463,000. The other major threat was Amazon that had constructed similar categories as ETSY hence was targeting their sellers through email and Facebook inviting them to try Amazon’s Handmade site. The marketing strategy by this giant online retailer was very comprehensive involving questionnaires to be filled and effectively hooking them through invite points.
Some of its sellers began selling counterfeit goods hence forcing others selling legit stuff to quit the ETSY site. The counterfeits were allowed by the company that opened gates for wholesale goods. Therefore, merchants opted to sell cheap, sub-standard goods from China and India. With this new arrangement, some merchants have shifted to sites like Shopify ( De Franco, Hope, Vyas, & Zhou, 2015) . Change of payment method also falls under the bracket of threats faced by the company. The shift from seller’s personal bank accounts to PayPal means long transaction time for the sellers although it translates to more profit margins for the company. However, these profits could be at the cost of losing some clients.
Why Buy ETSY, Inc. Stock?
The principal technique used in selecting ETSY, Inc. stock to buy involved the great entry points, a history of bullish trading activities in the shares, and improving fundamentals. Observation for unique trading activities and the best way to do this is by monitoring investments made by investors who have access to information channels that a regular person may not easily access or excellent experience of the market ( Christensen, Mikhail, Walther, & Wellman, 2016) . The predictions made by these investors have a much higher chance of being true especially when the pattern of the institutions investing changes from retail investors.
Another reason why the ETSY stock was selected for the long-term growth was since its prices increase proportionally to the volumes. Therefore, ETSY was considered as the strongest candidate since its number of shares traded is promising. Consider the data below on ETSY:
• 1-year performance vs. market: +222.62% vs. SPY
• 1-year performance vs. sector: +219.91% vs. XLY
• Current bullish unique trading indicators
The graph below indicates the top signs to buy ETSY Stock
Apart from the illustration that might look convincingly accurate, further analysis should be carried to establish whether the illustration sustains a long-term investment plan ( Welagedara, Deb, & Singh, 2017) . From the data below it is evident that ETSY is growing at an alarming rate thus recommended for buying:
Q4 2018 YoY revenue growth rate: +46.8%
Q4 2018 YoY adj. EBITDA growth rate: +47.5%
Conclusion
As much as the company is facing several threats but the P/E ratios indicate that it is growing extremely fast. Therefore, this makes it the best company to invest in as it has a promising future. Furthermore, if the threats are ironed out, the company stands to compete effectively with its competitors in online retail category.
References
Christensen, D. M., Mikhail, M. B., Walther, B. R., & Wellman, L. A. (2016). From K street to wall street: political connections and stock recommendations. The Accounting Review , 92 (3), 87-112.
De Franco, G., Hope, O. K., Vyas, D., & Zhou, Y. (2015). Analyst report readability. Contemporary Accounting Research , 32 (1), 76-104.
Keller, J., & Pastusiak, R. (2016). The Psychology of Investing: Stock market recommendations and their impact on investors’ decisions (the example of the Polish stock market). Acta Oeconomica , 66 (3), 419-437.
Patel, H. (2018). Target Price Achievement and Target Price Accuracy Models: An Analysis of Advisory Firms’ Recommendation for the Indian Banking Stocks. Global Business Review , 0972150918807090.
Welagedara, V., Deb, S. S., & Singh, H. (2017). Investor attention, analyst recommendation revisions, and stock prices. Pacific-Basin Finance Journal , 45 , 211-223.
