In July, I stated that I believed that shares of Etsy (NASDAQ:ETSY) were seeing tough times in an article for my Investing Group, but were not yet to be written off. This came after a year of stagnation in GMS in generally an inflationary environment, due to tough comparables and fee hikes hurting the commitment of users to the platform.
Despite a demanding multiple from an earnings point of view, appeal seemed to emerge as I believed that Etsy operated a strong and distinguished niche marketplace. With the company seeing stabilization in GMS (and modest growth) and the valuation coming down over time, now might be an opportunistic time to get involved.
A Unique Marketplace
Etsy is the marketplace for unique and creative goods, as the platform connects millions of sellers with tens of millions of buyers, which are looking for creative and non-standardized goods. The idea behind this is that e-commerce remains human, creating more engagement and loyalty, although repeat buying is somewhat challenged amidst the non-standardized goods typically offered.
The pandemic provided a huge boom to the results, with sales doubling to $1.7 billion in 2020, as the company posted GAAP earnings of $350 million, resulting in impressive margins, with earnings reported at $2.70 per share.
The operating momentum made that shares rose to a high of $250 in 2021, pushing up the market valuation to some $35 billion, equal to more than 20 times sales and 100 times earnings.
With momentum being strong and confidence on the rise, Etsy acquired fashion resale marketplace Depop in a $1.6 billion deal in the spring of 2021, as shares peaked at $300 later that year.
Shares fell to the $80 mark in July 2022, even as 2021 sales had risen to $2.3 billion, with earnings reported near half a billion. With an enterprise valuation (after accounting for $1.2 billion net debt at the time) of $13 billion, the valuations have become a lot more reasonable.
In the end, growth slowed down in 2022, with GMS for the year being down a percent, in what generally was a highly inflationary environment. Revenues rose by 10% to $2.56 billion nonetheless, due to higher rates reported by the platform, as the number of 7.5 million sellers and 95 million buyers was largely flattish. The company posted a $717 million EBITDA number, with realistic earnings pegged around $400 million, for an earnings number north of $3 per share based on a share tally of 126 million shares.
Etsy posted first quarter results in May with GMS coming in at $3.1 billion, as revenues of $640 million were up 10% on the year before. Earnings were reported at $75 million, as it looked like a clean cut number.
The second quarter guidance looked weak however, with GMS seen at $3 billion and revenues down (on a sequential basis) at $590-$640 million, implying no growth at the lower end of the guidance. This however came as the company lapsed the price hikes being effectuated a year before.
Still working with an earnings number around $3 per share, and believing in the long-term potential of the platform, I was not yet compelled at levels in the mid-eighties in July, but was contemplating a speculative position in the $70s, as that opportunity has arisen with shares now down to $73 in the wake of the second quarter earnings report.
The Second Quarter
Early in August, the company posted flattish GMS at $3.01 billion as revenues rose by 7% to $629 million. Marketplace revenues rose by 3% to $453 million as notably service revenues rose sharply, being up 20% to $176 million. This relates notably to advertising revenues and payment services. Net earnings were down 15% to $62 million, with GAAP earnings posted at $0.45 per share. Underlying operating momentum remains sound with the number of active sellers up to 8.3 million sellers, as the number of buyers has surpassed 96 million.
For the current third quarter, the company sees GMS between $2.95 and $3.10 billion, with revenues seen up to $610-$645 million, largely in line with the second quarter. Adjusted EBITDA margins are seen at 27-28%, as these margins came in at 26.4% in the second quarter.
This incremental margin improvement and the fact that the fourth quarter is typically stronger, meaning that I still believe in an earnings number of around $3 per share, as the net debt remains stable at around $1.1 billion as the company cautiously buys back some stock here, more as an anti-dilution measure to stock-based compensation issued.
More important than the next quarter’s sequential margin improvement are the improvements made in GMS in a tougher operating environment, as this observation, more platform engagement (in terms of active buyers and sellers) and savvy advertising revenue streams drive long-term growth potential.
And Now?
With expectations coming down further, and Etsy not having participated in the technology rally from the lows last year, I am appealed to the modest growth and combination with a lagging share price.
That being said, the continued higher interest rate environment raises the bar for investment as well, although I am generally pleased with the quarterly results and the outlook, which means that appeal is certainly increasing rapidly here. Moreover, the continued decline in GMS has come to a standstill, in fact, it rose by 0.1% for the month of June, having shown sequential improvements throughout 2023 so far.
Given this backdrop, it feels like the time to get involved with Etsy here, as I have my first limit orders ready around the $70 mark, with the intention to add on further dips from here onwards. At these levels, shares trade at a low twenty-times earnings multiple, at a discount to near-term risk-free rates, although with reasonable prospects for longer-term growth.
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