Etsy (ETSY) operates four e-commerce marketplaces. These include the namesake etsy.com, its greater asset, which features mostly handmade and vintage products, while the other three are Reverb, depop, and elo7.
Reverb is a musical instruments marketplace, enabling musicians to trade any part of the gear. Depop functions as a secondhand clothing marketplace, while elo7 focuses on the Latin American market.
The company has been quite prosperous, capitalizing on the rapidly growing e-commerce industry, with its revenues expanding swiftly over the past few years. Additionally, Etsy has managed to stay consistently profitable through its growth phase, which is a great feature amongst its industry peers.
Etsy’s stock has corrected significantly over the past couple of months, with investors likely re-evaluating its previously steep valuation multiple.
Despite that, the company continues to be a prime destination for e-shoppers, and with shares becoming cheaper lately, the stock could offer an attractive investment proposition. I am bullish on the stock.
Focusing On Bigger Picture
Etsy’s Q3 2021 results caused mixed feelings amongst investors, who likely questioned whether Etsy remains an appealing growth stock.
In Q3, revenues rose 18% year-over-year to $532.4 million. This compared with a growth of 128.1% in the prior-year period. Furthermore, the company guided for revenues of $660 million to $690 million in its upcoming earnings, implying growth of 10% year-over-year at the midpoint, which assumes an even more underwhelming rate than that of Q3.
While these rates are indeed not impressive, investors need to consider the bigger picture. The fact that Etsy is even recording additional growth following its excessive growth in the midst of the pandemic last year is not to be taken lightly.
Through the 2015-19 period, the company’s revenues used to grow anywhere from 18% to 46%. Then, between Q2 2020 and Q1 2021, Etsy posted four sequential quarters of triple-digit revenue growth, peaking at 141.5% in Q1 2021.
The enormous sales boost was powered by the surge in demand for handmade/custom masks and COVID-19-related essentials. In my view, Etsy could have well posted a revenue drop from last year’s inflated results and still have achieved quite strong numbers, relatively speaking.
Revenues of $430 million in Q3 (i.e., a negative revenue growth versus Q3 2020) would still suggest a growth of 117% compared to Q3 2019.
On the other hand, a counter-argument could be that Etsy’s shares snowballed last year, pricing in the company’s impressive results. On the other, however, I would argue that a forward P/S multiple of around 7.1, mixed with revenue growth expectations of at least 20% through 2025, is a somewhat frugal valuation multiple.
Wall Street’s Take
Turning to Wall Street, Etsy has a Moderate Buy consensus rating, based on 11 Buys, three Holds, and one Sell assigned in the past three months. At $251.29, the average ETSY price target implies 68.4% upside potential.
Conclusion
In my view, Etsy’s investment case does not present a mind-blowing opportunity at its current price levels, but it does not suggest a pessimistic one either.
That is especially evident when taking into account that Etsy is a high-margin company with its last-12-month gross and net income margins standing at 73.25% and 21.55%, respectively. Net margins should, in fact, continue expanding swiftly as the company scales, even if Etsy’s growth has indeed decelerated from last year’s one-off boost.
Following the stock’s recent correction, Etsy’s shares have returned to a rather attractive territory, and for this reason, I am bullish on the stock.
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