Etsy (ETSY 0.83%) is an e-commerce platform best known for its variety of handcrafted items. Last week, the stock rose almost 9% following some exciting news. Investment firm Elliott Management has reportedly acquired a 13% stake in Etsy. Moreover, one of the fund's partners, Marc Steinberg, has joined Etsy's board of directors.
At first glance, this may seem like rather mundane news. However, Elliott Management is unique because it is known for its reputation as an activist investor. Let's take a look at how this relationship could impact Etsy and what it could mean for investors.
What is activist investing?
Activist investing can take many forms. Additionally, while activist investing can sometimes seem shocking, it's not really anything new. Billionaire hedge fund manager Bill Ackman is widely considered one of the most influential activist investors today. Additionally, the media and entertainment giant Walt Disney is currently going through its own struggle with activist investor Nelson Peltz.
By taking a large enough stake in stock, activists can win a place on a company's board of directors. In doing so, activists typically attempt to convince other influential executives to support their proposals, which may include such things as management changes, acquisition opportunities, or cost control suggestions.
Who is Elliott Management?
Gaining insight into the activity of hedge funds and investment companies can be a bit tricky given their elusive nature. Fortunately, these funds are needed to file a form called 13-F each quarter. This is a good way for investors to understand where some of the biggest and most influential fund managers are investing.
According to Elliott Management's most recent 13-F filing, some of the company's most senior positions include Triple Flag Precious Metals, Marathon OilAnd Pinterest. Pinterest is an interesting company because it operates in a similar, albeit tangential, field to Etsy. Both of these companies have huge e-commerce applications and are extremely popular among social media users.
When it comes to Elliott Management specifically, the company often engages in what it perceives as turnaround opportunities. For example, the company made a notable investment in X (formerly Twitter) in 2020 and also published a letter to AT&Tin 2019. In each of these scenarios, the investment firm called for a management shake-up and spin-offs of non-core assets.
Should you invest in Etsy stock?
The investment case around Etsy is certainly interesting. On the one hand, the company experienced unprecedented growth during the height of the COVID-19 pandemic. The market has certainly become more mainstream as people look to create a unique work-from-home oasis.
Unfortunately, a difficult macro economy coupled with inconsistent repeat buyers led to a decline in demand, causing the stock to collapse. Additionally, Etsy also divested some of its acquired properties that did not generate the expected level of growth. The sluggish performance and seemingly disconnected portfolio of e-commerce markets, which include music platform Reverb, make for an interesting turnaround play.
However, keep in mind that this isn't Etsy's first rodeo as a turnaround story. In 2017, Etsy named Josh Silverman as CEO following drama within the executive leadership and board of directors. Additionally, last December the company announced it would make a series of layoffs amid stagnant growth.
While Etsy has a number of interesting potential AI-powered catalysts, my personal view is that changes need to be made beyond product and markets. Perhaps adding new ideas to the board through Elliott Management will spark the inspiration needed to turn things around at Etsy.
For now, however, perhaps the most prudent strategy is to observe the company's progress from the sidelines and evaluate whether Elliott's presence makes a difference for the better.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool posts and recommends Etsy, Pinterest, and Walt Disney. The Motley Fool has a disclosure policy.