Value-focused investors are always on the lookout for stocks that are priced below their intrinsic value. One such stock that deserves attention is Etsy Inc (NASDAQ:ETSY). The stock, which is currently priced at 75.47, registered a gain of 2.58% in one day and a decrease of 8.06% in 3 months. The stock has a fair valuation of $185.84, as indicated by its GF value.
Understanding GF Value
GF Value represents the current intrinsic value of a stock derived from our exclusive methodology. The GF Value line on our Summary page gives an overview of the fair value at which the stock should be trading. It is calculated based on the historical multiples (PE ratio, PS ratio, PB ratio and price-to-free-cash-flow) on which the stock has performed, with GuruFocus adjustments based on the company’s past returns and growth and future projections. traded on the factor. business performance.
We believe the GF Value Line is the appropriate value at which the stock should be trading. If the stock price is well above the GF value line, it is overvalued and is likely to have poor future returns. On the other hand, if it is well below the GF value line, its future returns are likely to be higher.
Is Etsy (ETSY) too good to be true? Comprehensive analysis of potential value traps
Potential Risks of Etsy
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its attractive valuation, some risk factors associated with Etsy should not be overlooked. These risks are primarily reflected through its low Altman Z-score of 1.71. These indicators suggest that Etsy, despite its apparent undervaluation, could be a potential value trap. This complexity underlines the importance of due diligence in making investment decisions.
Understanding the Altman Z-Score
Before going into the details, let us understand what Altman Z-score implies. Invented in 1968 by New York University professor Edward I. Altman, the Z-score is a financial model that predicts a company’s likelihood of bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each of which is weighted to create a final score. A score below 1.8 indicates a high probability of financial distress, while a score above 3 indicates a low risk.
Etsy Inc (NASDAQ:ETSY) Overview
Etsy is a top-10 e-commerce marketplace operator in the US and UK, with large operations in Germany, France, Australia and Canada. The company dominates an interesting niche, connecting buyers and sellers through its online marketplace for the exchange of vintage and craft items. With a consolidated gross merchandise volume of $13.3 billion in 2022, the firm has cemented itself as one of the largest players in the rapidly growing sector, listing fees, commissions on items sold, advertising services, payment processing And have generated revenue from shipping labels. By the end of 2022, the firm plans to add more than 95 million buyers and 7.5 million sellers on its marketplace properties: Etsy, Reverb (musical equipment) and Depop (resale of clothing).
Is Etsy (ETSY) too good to be true? Comprehensive analysis of potential value traps
Etsy’s Lou Altman Z-Score: Analyzing Key Drivers
A dissection of Etsy’s Altman Z-score suggests that Etsy’s financial health may be weakening, indicating potential financial distress. The EBIT to total assets ratio serves as an important barometer of a company’s operating effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Etsy’s EBIT and total assets ratio from historical data (2021: 0.15; 2022: 0.11; 2023: -0.26) indicates a declining trend. This shortfall suggests that Etsy is not using its assets to their full potential to generate operating profit, which can negatively affect the company’s overall Z-score.
When it comes to operational efficiency, a key indicator for Etsy is its asset turnover. Data: 2021: 0.88; 2022: 0.67; 2023: 0.97 This ratio suggests a recent decline after an initial increase over the past three years. The asset turnover ratio shows how effectively a company is using its assets to generate sales. Therefore, a decline in this ratio may indicate a decrease in operating efficiency, potentially due to underutilization of assets or a decrease in market demand for the company’s products or services. This change in Etsy’s asset turnover underscores the company’s need to reevaluate its operational strategies to optimize asset utilization and boost sales.
conclusion
Despite Etsy’s (NASDAQ:ETSY) undervalued status, the combination of its low Altman Z-score, declining EBIT to total assets ratio, and fluctuating asset turnover ratio suggest that it could be a potential value trap Is. Investors should exercise caution and conduct due diligence before making an investment decision.
GuruFocus Premium members can find stocks with high Altman Z-scores using the following screener: Walter Schloss Screen.
This article first appeared on GuruFocus.
