It’s worth taking a closer look at this pandemic darling, which still has the majority of its pandemic audience.
The handcrafted goods marketplace Etsy’s stock has fallen 55% from its all-time high (ETSY 2.31%). However, they are also 78% higher than their 52-week low, highlighting the significance of perspective when evaluating a stock’s market performance.
Although Etsy’s foundation appears solid enough to make it a compelling long-term investment, it is currently experiencing growth obstacles. Returns may be limited in the near future as a result of that last issue.
The long-term foundation of Etsy Etsy, like other online marketplaces, saw explosive growth as a result of the COVID-19 pandemic. However, Etsy maintained its growth in contrast to its e-commerce rivals, which merits further investigation.
First, the expansion. In 2020, Etsy saw a 111% increase in revenue year over year. Revenue increased by another 35% in 2021.
The retention is next. Etsy’s revenue increased only 9% in the first three quarters of 2022 compared to the same period in 2021, indicating that growth has clearly slowed. However, the platform has kept almost all of its users. There were 96.3 million active buyers at the end of 2021. There were still 94.1 million of them at the end of the third quarter of 2022.
Although the number of active buyers has slightly decreased, it is still more than double the 46.4 million active buyers it had prior to the pandemic.
At the UBS Global TMT Conference on December 6, Etsy CEO Josh Silverman made a statement about this dynamic that I believe the market completely overlooks and undervalues. Silverman repeatedly stated that Etsy is not a supply-constrained but rather a demand-constrained company.
To put it another way, Etsy currently has more products for sale than it could ever hope to sell given the current level of demand. The platform is capable of handling virtually any surge that may occur. In 2020, this was proven. Without a hitch, revenue doubled. The platform’s merchants were ready to step up and provide the goods; they just needed buyers.
Given how long has passed since the pandemic’s inception, why do customers continue to shop on Etsy? According to Silverman,
customers who made purchases through Etsy were pleasantly surprised by the variety of goods available on the platform. To put it another way, the platform exceeded the expectations of customers.
The evidence indicates that Etsy was able to maintain the new user base it gained during the pandemic while also being prepared for any subsequent spike in demand.
Keep in mind that this is an appealing business model for investors. As of the third quarter of last year, Etsy had a high gross margin of almost 71% because it takes a cut of transactions that take place on the platform. Operating cash flow in the quarter was nearly $207 million, which is quite good for a company with a market capitalization of only $17 billion due to the model’s low capital requirements.
The focus on Etsy’s operating cash flow in the near future I bring this up because Etsy’s net income currently looks terrible. Additionally, this is as a result of the company’s most recent acquisitions of Brazilian handmade platform Elo7 and Depop, a marketplace for used clothing. In 2021, Etsy paid $1.6 billion and $217 million, respectively, for the acquisitions of Depop and Elo7. To put it succinctly, it paid too much.
Etsy took a $1 billion goodwill impairment charge in the third quarter to reflect the acquired businesses’ lower value. The company’s $804 million year-to-date net loss is explained by this noncash charge, which appears in net income.
It is fortunate that Etsy is now in the clear and can concentrate on expanding its smaller platforms. In the hope of expanding these marketplaces, management is applying what it has learned from operating Etsy, including its search algorithms, to Depop and Elo7.
Despite this, the company won’t be able to grow in 2023.
The Etsy platform’s gross merchandise volume, or total value of all sales, is approximately 6.5 times greater than that of its Depop, Elo7, and Reverb platforms taken as a whole. Therefore, even if Etsy is able to initiate growth on these other marketplaces, the overall business would not benefit significantly.
In 2022, Etsy’s growth has slowed, as mentioned. Management noted that in October, trends improved. However, it maintained its guidance for fourth-quarter revenue of $700 million to $800 million. This indicates that revenue may actually be lower than the $717 million reported in the fourth quarter of 2021, to put things in perspective.
The market may continue to be bearish on Etsy in the near future due to the company’s slowing growth into 2023. However, when it reaccelerates, its business has significant advantages and can satisfy demand. As a result, Etsy stock appears to be a stock in which long-term investors can patiently establish a position for the foreseeable future.