Avoid These 2 Recently Downgraded E-commerce Stocks

NASDAQ: EBAY | eBay Inc. News, Ratings, and Charts

EBAY – The e-commerce market soared last year as nationwide lockdowns and the fear of contracting coronavirus kept shoppers indoors. However, now that the economy is reopening on the back of accelerating vaccine rollouts, online platforms are seeing reduced traffic. This, along with investors’ rotation away from pandemic winners and toward cyclical stocks, could drive a further retreat by the weaker e-commerce players. As such, analysts have recently downgraded eBay Inc. (EBAY) and Etsy, Inc. (ETSY) because their near-term prospects look bleak. Let’s take a closer look.

E-commerce platforms got a big boost from the COVID-19 pandemic. The public health crisis triggered the rapid digitization of commerce and trade. Nationwide shutdowns forced people to stay home and rely on online platforms for their shopping needs. 

However, rapid progress on the vaccination front around the globe has led to much subdued performance by the online commerce sector  so far this year. There are also rising fears of a post-pandemic slowdown of the e-commerce industry.

This, combined with investors’ rotation to cyclical stocks amid the economic recovery, could drive a greater pullback by fundamentally weak e-commerce stocks. Analysts have recently downgraded eBay Inc. (EBAY) and Etsy, Inc. (ETSY) given their bleak growth prospects. So, we think it could be wise to avoid these stocks now.

eBay Inc. (EBAY)

EBAY is a global commerce leader that operates an online marketplace platform that connects buyers and sellers in more than  190 countries worldwide. Founded in 1995, the EBAY platform enables users to list, buy, sell, and pay for items and facilitate payments on behalf of users, merchants, retailers, and brands.

Shares of EBAY lost 10% intraday on April 29, after two investment firms downgraded the stock. Susquehanna has lowered its r rating, noting that “at this point, with tough comps, the recovery, and increasing investments, we see the risk/reward as balanced for the stock and are moving to Neutral.” Analysts at Wedbush lowered the price target also amid its lower gross merchandise volume (GMV) outlook. Wedbush also suspects the coming four quarters could  potentially deliver negative year-over-year GMV growth. Analysts at Stifel and Barclays have also recently cut  their price expectations of EBAY.

In the first quarter, ended March 31, EBAY generated $3 billion in revenues, surging 42% year-over-year. Its GMV increased 29% year-over-year to $27.5 billion, leading to its  highest revenue growth since 2005. The company continued to scale its management of payments globally, with more than  52% of global on-platform volume processed through managed payments during the quarter. Notably, its annual active buyers during the quarter grew 7%, with the total now 187 million. Its non-GAAP EPS came in at $1.09, rising 59% year-over-year.

EBAY closed  a fantastic 2020 that witnessed volume growth that was more than its  prior seven fiscal years combined. As a result, the stock has returned 43.6% over the past year. However, EBAY’s management has recently raised concerns that the people’s mobility  has now improved in most of its  markets and that fewer people might turn to digital stores. Consequently, it has issued a conservative outlook for the current year and expects its EPS to lie in the $0.91 to $0.96 range in the second quarter. In fact, Wall Street analysts expect its EPS for the current quarter to decline 6.9% year-over-year.

EBAY’s POWR Ratings reflect a bleak outlook. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an overall C rating, which translates to Neutral in our proprietary rating system. EBAY has a D grade for Sentiment, and a grade of C for Growth and Stability. It is ranked #9 of 71 stocks in the F-rated Internet industry.

In total, we rate EBAY on eight different levels. To see additional POWR Ratings for Value, Momentum and Quality, click here.

Etsy, Inc. (ETSY)

ETSY operates two-sided online marketplaces that connect millions of buyers and sellers around the world. Its primary marketplace, Etsy.com, is the global destination of more than  66 million unique handcrafted and creative goods. It also provides various seller services, including Etsy Payments, Etsy Ads, and Etsy Shipping Labels.

Analysts at KeyBanc lowered ETSY last week to a “Sector Weight” rating from “Overweight”, citing fair valuation and concerns about the company’s near-term earnings. Investors reacted moderately to the report and the stock slid 4.4% on April 26, the day the downgrade occurred. However, ETSY declined  14.6% intraday on Thursday after the company reported financial results for the first quarter of 2021. The quarterly report reflects exceptional growth, but management’s guidance for the second quarter suggests sales will cool off, thereby corroborating some of  KeyBanc’s concerns.

ETSY’s Revenues for the first quarter (ended March 31, 2021) improved 141% year-over-year to $291 million. Its global gross merchandise sales (GMS) were $3.1 billion, surging 132.3% year-over-year. Its mobile GMS accounted for  63%, while international GMS came in at 42%. Notably, its total active buyers skyrocketed 90% to 90,654 from the same period last year. ETSY reported $1.00 in EPS  for the quarter, compared to the $0.10 year-ago value .

GMS per active buyer on a trailing-twelve-month basis was up 20% year-over-year, driven by engagement among its most valuable customers, specifically habitual buyers who represent on average approximately t 40% of the company’s marketplace GMS and its fastest growing buyer segment. However, in its  first-quarter shareholder letter, management commented that “we currently expect Q2 2021 GMS to decelerate along with the rest of e-commerce as we lap the tremendous 2020 growth rates.” Analysts further expect the company’s EPS for the current quarter to decline 17.3% year-over-year.

ETSY’s weak prospects are also apparent in its POWR Ratings. The stock has a D grade for Value, Sentiment and Stability. It is ranked #23 in the Internet industry.

To access additional POWR Ratings of ETSY for Growth, Momentum and Quality, click here.

EBAY shares were trading at $59.77 per share on Friday afternoon, up $0.95 (+1.62%). Year-to-date, EBAY has gained 19.32%, versus a 13.22% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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