Etsy (ETSY) is the company behind four e-commerce marketplaces, including the namesake etsy.com, which is by far its most popular, specializing in handmade and vintage products. The other three are Reverb, depop, and elo7. Reverb is a musical instruments marketplace, helping musicians trade any component of the gear. Depop serves as a secondhand clothing marketplace, while elo7 specializes in the Latin American market.
The company has been very successful in capitalizing on the rapidly growing e-commerce industry, with its sales snowballing over the past few years. Further, unlike most hyper-growth companies that reinvest the majority of their gross profits, Etsy has also managed to stay consistently profitable. Hence, shares have appreciated nearly tenfold since Etsy’s IPO back in 2015. (See ETSY stock charts on TipRanks)
Nonetheless, the stock has lagged lately, as investors fear a potential slowdown in Etsy’s top line. Putting things into context, however, such fears seem to be overblown. I am bullish on the stock.
Putting The Slowdown Fears into Perspective
Etsy’s latest quarterly results induced mixed feelings in investors and analysts alike. In Q2, revenues grew 23.4% year-over-year to $528.9 million. This compared with a growth of 136.7% in the prior-year period. Furthermore, the company guided for Q3 revenues of $500 to $525 million, suggesting growth of 13.5% year-over-year at the midpoint, which is an even more underwhelming rate than it showed in Q2.
While these rates are not the most exciting, we can’t ignore the bigger picture. The fact that the company is even posting further growth following its absurd expansion in the midst of the pandemic is utterly impressive. From 2015 to late 2019, Etsy’s revenues would grow anywhere from 18% to 46%. Then, from Q2-2020 to Q1-2021, Etsy posted four consecutive quarters of triple-digit growth, peaking at 141.5% year-over-year in Q1-2021.
The massive sales boost was attributed to the surge in demand for handmade/custom masks and COVID-19-related items. Truthfully, Etsy could have reasonably posted a revenue decline from last year’s spiked results and still have performed quite strongly. Sales of $410 million in Q2 (i.e., a negative revenue growth vs. the prior-year period) would still imply growth of 79.8% vs. Q1-2020 (i.e. five quarters back instead of four).
Of course, a counter-argument could be that since Etsy’s shares quadrupled in 2020 alone, higher expectations are priced into the stock. Yet, I would argue that a forward P/S multiple of around 11.9, combined with revenue growth expectations of at least 20% through 2025, is a rather fair valuation.
The stock does not present a mind-blowing opportunity at its current levels, though it does not present a pessimistic one either. That is especially apparent when considering that Etsy is a high-margin business with LTM (Last-Twelve-Month) gross and net income margins of 73.8% and 22.45%, respectively. The latter should also continue expanding rapidly as the company scales, further defending the stock’s valuation.
It’s also worth highlighting that excluding Etsy’s top & bottom lines, the company’s other meaningful metrics remained remarkably strong. The company’s primary marketplace, for instance, proceeded to onboard a great number of new sellers. Active sellers reached 5.2 million against 4.7 million sequentially. An increasing number of sellers should expand Etsy’s total listing and attract more buyers. Furthermore, it should reassure investors that the pandemic did not provide a one-off boost, causing sellers to decline in a post-COVID-19 world, but instead lifted Etsy to a new plateau.
Wall Street’s Take
Turning to Wall Street, Etsy has a Strong Buy consensus rating, based on nine Buys, two Holds, and zero Sells assigned in the past three months. At $212.36, the average ETSY price target implies 2.15% downside potential, nonetheless.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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