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Etsy facing alternative scenarios, suggests broker Wedbush

Etsy shares surged yesterday as two investment firms revealed stakes in the company
Etsy facing alternative scenarios, suggests broker Wedbush
Wedbush repeats a 'neutral' stance and targets $9 a share on the e-commerce business

Online crafts retailer Etsy (NASDAQ:ETSY) comes under the gaze of broker Wedbush on Wednesday, which reckons it is faced with a challenge to reaccelerate growth.

Shares surged yesterday as it was revealed two investment firms had stakes in the company, and it said it was reviewing its strategy.

TPG Group Holding Advisors and Dragoneer Investment Group jointly reported having an 8% stake in Etsy.

That came weeks after activist hedge fund Black-and-White Capital, which owns roughly 2%, urged it to explore a potential sale.

"After the recent disclosure from TPG, we believe 7.5% of Etsy shares now held by activist investors," said Wedbush, which considers three scenarios next - a buyout, an acquisition or keeping the status quo.

Given Etsy's relatively unlevered balance sheet and sufficient debt service coverage ratio, we believe Etsy has the capacity to take on the additional debt load required under a buyout scenario, it suggests.

Analyst Aaron Turner reckons  a strategic acquisition of Etsy is 'possible, but unlikely'.

"The two natural buyers for Etsy, Amazon and Ebay, already have all of Etsy's buyers and most of their sellers thus lowering the premium these companies would be willing to pay for Etsy's platform, in our opinion."

He concludes: "We view Etsy as analogous to other niche e-commerce companies such as Zulily, GRPN, Gilt, etc. These companies experienced rapid growth as they capitalized on their respective TAM opportunities, but reached abrupt growth ceilings once the TAMs were sufficiently captured.

"While it's possible that Etsy may be able to reaccelerate growth through incremental marketing spend, we believe this would be incongruous to earnings and cash flow growth."

Wedbush repeats a 'neutral' stance and targets $9 a share.

Shares are currently at $12.92 each.


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