Sell-Side Sentiment On Etsy Not Looking Favorable

Up to 5 percent of the merchandise sold via Etsy Inc (NASDAQ: ETSY) may be counterfeit or in violation of copyright laws, an analyst said Monday.

Etsy, off more than 30 percent since going public last month, changed hands recently at $20.85, down 7.9 percent.

The online platform for handmade goods "has become a go-to destination for counterfeits," said Wedbush's Gil Luria, who downgraded the company to Underperform from Neutral with a $14 target on Monday, citing the concern.

At least two other analysts initiated coverage on the company at Neutral Monday, including Morgan Stanley and Goldman Sachs. Both firms set a $20 price target on Etsy and said the company's lead within its market niche is "priced in" to the shares.

Etsy has acknowledged the risk of reputation damage posed by public perception that Etsy commonly sells counterfeit goods.

Etsy has said it "frequently" gets complaints about such items and, if proven correct, Etsy removes the items and sometimes closes the shops of repeated violators.

Although its unlikely Etsy could be held directly liable, Luria said questionable selling practices on the site "may draw increased scrutiny" and limit Etsy's growth by tarnishing its image.

Luria said his research suggests as many as 2 million items on Etsy, or 5 percent of all its merchandise, may be counterfeit or otherwise in violation of trademark or copyright rules.

Etsy counterfeit candidates include items infringing on Louis Vuitton, Michael Kors and a wide range of Disney and NFL items, Luria said.

The problem isn't unique to Etsy, with eBay Inc (NASDAQ: EBAY) recently eliminating a raft of brands from its website and Alibaba Group Holdings Ltd (NYSE: BABA) recently facing a sharp backlash, according to Luria.