Etsy has become a 'clearinghouse for counterfeit goods': Short-seller

Longtime short-seller Citron Research took aim at Etsy (ETSY) in its latest report, alleging the online marketplace welcomes counterfeit merchandise and the company's behavior is "borderline criminal."

Etsy shares fell about 9% over the week's final two trading days after the report was released early Thursday.

"The platform has one monster copyright trademark problem, and counterfeit [problem]," Citron founder Andrew Left told Yahoo Finance Live in an interview on Friday.

Left contends that there are thousands of fake items being sold as brands like Nike, Disney, Louis Vuitton, and Rolex. While the issue of counterfeit goods has long plagued the site, the prevalence has hit "ridiculous levels," Left said.

"I understand that they have a whole transparency report and they say they’re policing it, but they're not," Left said. "It seems inherent to the business."

In his report, Left wrote: "We believe management has knowingly or, at the very least, negligently, turned this company into the largest organized clearing house for counterfeit goods in the world while not only allowing the behavior but encouraging it and promoting it by selling placement and status to the millions of sites that regularly violate copyright laws."

Left argued Etsy allows sellers to pay to promote certain keywords, including the alleged counterfeit brand names. But Etsy doesn't appear to have keyword-specific ad services, exactly; the company allows sellers to pay to promote their listings in searches.

Etsy said in a statement it has stepped up efforts to eliminate counterfeit goods from its site: "Counterfeit items, fraud and other illicit practices are explicitly prohibited on Etsy, and our dedicated teams work diligently to remove listings that violate our policies."

In addition to the transparency report, the company has a portal to report alleged copyright violations.

Any site that allows third-party sellers — from Amazon, to eBay and Alibaba — has to contend with the threat of counterfeits and, therefore, intellectual property lawsuits. Some of them may be addressing the problem better than others.

"Etsy doesn't really have channels in place to suss out the counterfeit items," said Hitha Herzog, chief research officer at H Squared Research and author of "Black Market Billions: How Organized Retail Crime Funds Terrorists." That said, Herzog acknowledged the challenge for all online retailers hosting third-party sellers.

"It’s like cockroaches: you see one, you kill it, and there's 20 more."

Tom Forte, senior research analyst at D.A. Davidson, said Etsy has taken steps to address counterfeiting.

"I see counterfeit merchandise as a structural issue for marketplaces," said Forte, who has a Buy rating on the stock. "I do not think Etsy is any worse at managing counterfeit merchandise than other marketplaces. Etsy has tried to address this issue by implementing a multi-million [dollar] program to protect buyers on its platform.”

Etsy is set to report its fourth-quarter earnings after the close of trading on Feb. 22. In addition to the Citron report, shares were hit this week because of weak results from Shopify, which some investors see as a proxy.

Analyst Jason Helfstein at Oppenheimer wrote in a note to investors that a weak fourth quarter is priced into the shares: "While expensive, trading at 18x '24E EV/EBITDA vs. peers at 13x, we would caution investors who may be short."

Year-to-date, Etsy shares have gained about 8% through Friday's close. From record highs reached back in the fall of 2021, the stock remains down more than 50%.

Left has been publishing short research for decades; he took a break from the practice in 2021 when he was the subject of personal and physical threats following his short call on GameStop. He said the bar is now higher for him to highlight a short idea, and can't just be a bad business with a high valuation.

"It's not against the law to have an overvalued stock. I said: I'm not going to discuss overvalued stocks. You want to buy GameStop because it's going to the moon — go ahead, have fun. And if Etsy goes higher, it goes higher. What I'm saying is that Etsy is operating illegally," Left said.

When Yahoo Finance followed up via text to ask if Left is short the stock and the size of his position, he replied: "lol."

Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9am-11am ET. Follow her on Twitter @juleshyman, and read her other stories.

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