Shares of Etsy, Inc. (NASDAQ: ETSY) have fared terribly since its 2015 initial public offering (IPO). The company priced its IPO at $16 per share on April 16, 2015. The share price quickly shot up to $31 and then started a precipitous decline that continues into 2016. As of mid-January 2016, Etsy shares trade for under $7.
Company Overview
Etsy is a peer-to-peer e-commerce website where users buy and sell mostly handmade crafts, vintage items, art and photography. It works like a cross between Amazon and eBay but with a focus on unique items as opposed to mass-produced merchandise. The site launched in 1998 and grew steadily over the first decade of the 21st century. The company made its one-millionth sale in 2007, and in 2008 received $27 million in venture capital money.
The company announced its IPO in March 2015 and officially went public on April 16 of the same year. After a brief initial surge, the stock began declining, and by mid-June it had fallen below the IPO price of $16 per share.
Analyst Matthew Frankel at The Motley Fool ranks Etsy as the worst IPO of 2015. Though the company is still adding users and enjoying robust revenue growth, its earnings were negative in 2015. Moreover, rival Amazon's handmade section, a new offering for 2015, represents a potentially strong competitive threat to Etsy.
How a Day Three Investment Would Have Fared
One way to determine if you should have invested in a company early is to put yourself in the shoes of an investor who got in shortly after an IPO.
If you had invested in Etsy stock on day three, you would be sitting on a sizable loss as of January 2016. In hindsight, buying Etsy shares shortly after the IPO is the absolute worst thing you could have done as an investor. The stock actually enjoyed very brief success after the company went public, and only after an initial sharp rise did it begin its long trek downward.
The IPO price was $16, but shares were trading above $30 by the end of the first day. The decline began in earnest on day two. On Etsy's third trading day, April 20, the stock opened $28.77 and closed at $24.90.
Assume you purchased your shares toward the end of day three when they were trading at $25. If you had purchased 100 shares, your initial investment would have been $2,500. Over the ensuing nine months, you would have watched and winced as that total steadily declined. As of mid-January 2016, Etsy shares trade for under $7. As of January 2016, your $2,500 investment would be worth under $700.
There Is Still Hope
Investing is a long-term proposition, and Etsy does not have nearly a lengthy enough track record as a public company for anyone to make an accurate judgment about the stock's long-term prospects. On a 20- or 30-year chart, nine months represents a tiny blip of time. Less than a year of bearish movement could be part of a larger trend, or it could just as easily be a temporary drop for an otherwise bullish stock. Therefore, a long-term investor who took a chance on Etsy after the IPO would be unwise to dump it now, at a substantial loss, simply because it has not lived up to expectations thus far.
Look at the graph of any stock that has appreciated over a long period and it rarely, if ever, shows an uninterrupted upward march. Even the most bullish stocks rise in a zig-zag pattern, the long zigs representing price appreciation and the shorter zags indicating temporary pullbacks and corrections. Fundamental analysis of a company through its financial statements and its annual and quarterly reports provides a better picture of its stock's long-term prospects versus examining nine months of price movements.
