Etsy Inc (NASDAQ:ETSY), the homemade arts and crafts site, has been downgraded to Underperform from Neutral, by Wedbush analysts as they believe the site could have as many as two million items which may potentially be either counterfeit or constitute trademark or copyright infringement.
Gil Luria and Aaron Turner of Wedbush, who have initiated a fresh research report on May 11, 2015 on Etsy, believe the questionable seller practices may draw increased scrutiny.
Etsy has limited addressable market
The Wedbush analysts note Etsy’s focus on handmade and artisanal items limits its total addressable market to a few key categories, such as Apparel & Accessories, Greetings & Misc. Gifts, Jewelry & Watches and Toys & Hobbies. Citing comScore, they point out that these four categories would translate to just 13% of the total e-commerce market:
However, as can be deduced from the following graph, these addressable categories have been decelerating as a group:
Shedding more light on the counterfeit risk that could impact Etsy, the analysts point out that, based on their research, as many as two million items on Etsy (representing over 5% of all merchandise) may be either counterfeit or constitute trademark or copyright infringement.
Etsy faces broader counterfeit risk
Elaborating on their research, the analysts point out that they have reviewed hundreds of these items and didn’t find indications that any of these sellers are official licensed retailers of those brands. Based on their analysis after ordering few of the items, they observed that these items didn’t reveal any visible evidence of a trademark as one would find on an officially licensed product.
Luria and Turner also cited lack of evidence of a trademark in the hologram sticker on NBA gear or tag on Disney items, placing these items at a high risk of being counterfeit or a trademark/copyright infringement:
Counterfeit candidates include items infringing on Louis Vuitton, Chanel and Michael Kors, besides a wide range of Disney and NFL brands. However, the Wedbush analysts point out that to establish an item is indeed counterfeit or represents a trademark / copyright violations, one would require a brand’s examination of the specific item. The analysts also note some items do appear to deserve the Fair Use exception to the law that allows for art or items where the brand is sufficiently transformed to use trademarks.
Thus Luria and Turner emphasize that they can’t be certain these items are indeed infringing on trademarked brands. Moreover, their reference to attorneys specialized in copyright law couldn’t validate trademarks infringement with certainty, without pursuing each individual item.
The analysts highlight that sample of high risk listings reveals some violations may be 20x more likely on Etsy than eBay and even more likely than Alibaba’s Aliexpress.
Luria and Turner, however, don’t believe Etsy is unlikely to be directly liable for the infringement based on the Tiffany Vs eBay precedent and protection available under the Digital Millennium Copyright Act. They caution that if Etsy chooses to continue to ignore these potential violations, it could tarnish its brand with both buyers and sellers. Drawing a parallel to the broad backlash on Alibaba regarding inauthentic merchandise, the analysts anticipate added scrutiny given the social responsibility ethos at the core of its Etsy’s brand.
Last month, ValueWalk detailed Wedbush’s coverage on Etsy pegging its PT at $14. The Wedbush analysts in their latest research report, however, retained their $14 PT based on a 23x multiple on FY16 EBITDA estimate, in line with closest comparable Alibaba, given similar growth trajectories.
Following Wedbush’s latest report, Etsy’s shared plunged over 9% to $20.60 during early morning trading Monday.
