- By GF Value
The stock of Etsy (NAS:ETSY, 30-year Financials) appears to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $164.18 per share and the market cap of $20.9 billion, Etsy stock appears to be modestly undervalued. GF Value for Etsy is shown in the chart below.
Because Etsy is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 51.9% over the past three years and is estimated to grow 24.80% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Etsy has a cash-to-debt ratio of 1.23, which is better than 68% of the companies in the industry of Retail - Cyclical. The overall financial strength of Etsy is 5 out of 10, which indicates that the financial strength of Etsy is fair. This is the debt and cash of Etsy over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Etsy has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $2 billion and earnings of $3.53 a share. Its operating margin is 26.82%, which ranks better than 96% of the companies in the industry of Retail - Cyclical. Overall, the profitability of Etsy is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Etsy over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Etsy's 3-year average revenue growth rate is better than 97% of the companies in the industry of Retail - Cyclical. Etsy's 3-year average EBITDA growth rate is 80.9%, which ranks better than 96% of the companies in the industry of Retail - Cyclical.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Etsy's ROIC is 83.50 while its WACC came in at 13.06. The historical ROIC vs WACC comparison of Etsy is shown below:
In conclusion, Etsy (NAS:ETSY, 30-year Financials) stock gives every indication of being modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 96% of the companies in the industry of Retail - Cyclical. To learn more about Etsy stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.