Trump Tariffs: 1 Red Flag for Etsy, and 1 Green Flag

The three major indexes have declined in recent weeks. The Nasdaq Composite (NASDAQINDEX: ^IXIC) even entered correction territory as investors worried about the impact of President Donald Trump's tariffs on the economy and corporate earnings.

The initial tariffs apply to imports from China, Canada, and Mexico -- the U.S.' top trading partners -- and the Trump Administration says it put them in place as a response to a flow of lethal drugs into the U.S. In recent days, though, the president also announced tariffs on steel and aluminum imports, and these apply to all countries.

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Economists have warned that the import tariffs may result in higher prices, something that could get in the way of much anticipated interest-rate cuts, and a higher price and interest-rate environment may hamper growth. Companies most dependent on growth, from tech to consumer goods, have seen their shares sink in recent days.

Now, one particular consumer stock may experience both a positive and negative impact from some of the tariffs. I'm talking about Etsy (NASDAQ: ETSY), a stock that's already fallen about 60% over the past three years. Below, I'll check out the red and green flags on the horizon and consider whether the stock is a buy.

Image source: Getty Images.

Red flag: Impact on households

The Trump administration aimed to launch tariffs on China, Canada, and Mexico in early March but delayed by one month tariffs on goods covered by the free trade agreement known as the United States-Mexico-Canada agreement. But once these go into effect, a variety of goods imported into the U.S. may then sell for higher prices. For example, Target says it relies on fruit and vegetables from Mexico at this time of year and might have to raise prices on some of those products.

Higher prices on essentials could weigh on households, making it more difficult for them to spend on discretionary items -- the type generally sold on Etsy. In fact, in recent years, through a higher interest-rate environment, Etsy found itself facing this particular headwind. When consumers' buying power is low, they generally favor essentials over non-essentials.

To illustrate this point, Etsy's non-U.S. gross merchandise sales (GMS) in the recent quarter underperformed GMS in the U.S. market. The company says this is due to unfavorable economic environments in many of its international markets. In the U.S., rising inflation in 2022 resulted in "significant macroeconomic headwinds" and initiated a phase of declines in annual GMS that has continued through 2024.

Green flag: Potential reduction in competition

Trump's tariffs don't yet concern imports from China that are worth less than $800. For the moment, they enter the country duty-free as it's complicated to collect tariffs on the massive number of low-value packages that cross the border. The Trump administration, though, has indicated that once systems are in place to efficiently collect tariffs on those items, they no longer will be exempt, and that could greatly reduce competition for Etsy.

Etsy isn't heavily dependent on China for imports, as most of their sellers rely on materials they find within 60 miles from home. As a result, tariffs applied there won't weigh on the company.

However, one problem the e-commerce player has faced in recent times, especially in light of economic pressures, is the existence of cheaper alternatives to the hand-made creations found on Etsy. The company recently said today's customers favor low prices and fast delivery, areas where other companies dominate.

"I think to the extent that we see tariffs that are very focused on China... I think, at least in the near term, Etsy is a net beneficiary from that," Chief Executive Officer Joshua Silverman said during the recent earnings call.

What does this mean for investors?

Etsy posted tremendous growth early in the pandemic, but in recent years, economic factors and competition have made it difficult to maintain momentum. In the most recent quarter, for example, GMS declined as did the number of active buyers and habitual buyers.

The company has taken several steps to help shoppers better discover the best products it has to offer. For example, it is supercharging search algorithms in order to factor in elements like product reviews and fast shipping. Even during difficult times, Etsy's capital light business model helped it turn a great amount of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) into free cash flow -- about 90% in the recent quarter.

What does all of this means? No matter whether Etsy experiences headwinds or tailwinds from the Trump trade war -- or a bit of both -- the stock, trading at about 9x forward earnings estimates, looks like a bargain buy today.

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Adria Cimino has positions in Target. The Motley Fool has positions in and recommends Etsy and Target. The Motley Fool has a disclosure policy.