Etsy fell on Thursday after Morgan Stanley downgraded its outlook on the company on worries that recently introduced sales-tax legislation in some U.S. states and a decision to cut advertising investment may hurt growth.
Morgan Stanley's Lauren Cassel downgraded its rating on Etsy to underweight from equal-weight and cut her price on target on the stock to $38 from $52. Etsy (NASDAQ:ETSY) fell about 3%.
Changes in sales-tax compliance laws – introduced at the start of October requiring marketplace facilitators like Etsy to collect and remit sales tax in more than a dozen states – have created a greater risk of cart abandonment and lower conversion, Cassel said.
The crafts marketplace may also see fourth-quarter growth come under pressure following its decision to cut investment in product-listing ads – a proven source of traffic to many Etsy shops - and focus on driving sellers to ramp up marketing spend.
The strategy has a longer payback period and may lead to slower growth, Morgan Stanley suggested.
These headwinds, however, are more than likely to offset the company's free-shipping program, which was rolled out in July this year.
“A shorter holiday calendar and algorithm changes are two other 4Q risks.” Morgan Stanley (NYSE:MS) said.
“While we like Etsy's business model and competitive moat it has established, we now anticipate slowing core GMS growth to result in negative top-line and EBITDA revisions, likely leading to additional multiple compression,” it added.
