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We're barreling through earnings season, and soon we'll be learning how Etsy (NASDAQ: ETSY) performed in its most recently completed quarter.

In an instance of interesting timing, one analyst got notably more bearish about prospects for the handmade-goods website operator. In fact, he knocked his recommendation down a peg while chopping his price target on the stock. Here's why he has soured on the company.

Market saturation worries

Just two weeks away from Etsy's scheduled first-quarter earnings release, Morgan Stanley's Nathan Feather downgraded his recommendation on Etsy stock to underweight (read: sell) from his previous rating of equal weight (hold). He underscored this with an assertive cut in his price target, to $55 per share from $64. The stock recently traded at about $67.

Etsy was quite the success story during the pandemic, when much of the world was effectively stuck indoors looking for ways to occupy their time -- and, for a while, seeking cloth masks to help reduce their chances of getting sick.

In his latest research note on the company, Feather expressed admiration for how the company has managed to lift gross merchandise sales (GMS), a key financial metric for its business, by roughly 165% since 2019 -- the year prior to the start of the global health emergency.

However, he wrote, "After the Covid pull-forward, we believe Etsy has reached a new level of saturation which may limit the medium-term GMS growth trajectory and multiple." In his view, the company is "far closer" to saturation in its most significant markets, which could very much limit its upside.

They're coming into the store, but not buying

Feather also cited statistics indicating that while Etsy has brought in around 57 million new buyers and reactivated another 51 million since 2021, its core GMS had fallen by 5% from then through 2023.

Personally, I wouldn't be comfortable investing in a company that has been struggling for some time to raise its most important revenue figure. Mix that with the increases in customer count, and you've got a troubling dynamic. This feels like a stock to avoid for now, and I think Feather's sell recommendation is well considered at the current share price.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Etsy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.