Online marketplace Etsy (ETSY -1.24%) crushed it in its fourth quarter, posting accelerating revenue growth for a third quarter in a row, higher-than-expected gross merchandise sales (GMS), and strong growth across a range of other key metrics.
As investors digest the implications of Etsy's faster growth, they can glean more about the company's impressive progress from its fourth-quarter earnings call with analysts. Two topics that stood out during the call were management's view for further growth and the possibility of margin expansion.
Image source: Etsy.
There's a "long runway" ahead for more growth
Since Etsy reported disappointing first-quarter results and replaced former CEO Chad Dickerson with board member Josh Silverman in May last year, Etsy's revenue growth has consistently accelerated, rising from 18.4% year over year in the first quarter of 2017 to 23.6% in Q4.
With such a strong boost to Etsy's revenue growth rates, some investors may be wondering whether this more robust pace is sustainable.
Of course, a good place to start in answering this question is Etsy's growth outlook. Based on its guidance for 2018 revenue to increase 21% to 23%, up from 20.9% in 2017, management undoubtedly has confidence in Etsy's continued growth prospects. The CEO discussed this optimistic outlook further during the earnings call.
"We're excited about the long runway for continued growth that we believe is still ahead of us," said Silverman (via an S&P Global Market Intelligence transcript).
Silverman continued:
Since May 2017, we launched approximately 350 product enhancements, with more than 20% having a measurably positive impact on GMS. ... We feel confident that we can continue to launch product enhancements at a rapid pace and improve the overall buyer and seller experience in ways that positively impact GMS.
Expect margins to look more like eBay's
Since Silverman took the helm at Etsy, investors have witnessed his prowess in improving the marketplace's profitability. Etsy's fourth-quarter operating margin was about 13%, up from approximately 3% in the year-ago quarter. Etsy also reported a record fourth-quarter adjusted EBITDA margin of 25.6%, up 11.7 percentage points year over year.
But where can Etsy's profit margins go from here? When one analyst asked about Etsy's long-term margin potential, Silverman said investors should look to other marketplace businesses for what's possible:
So marketplace businesses are wonderful businesses. They are really hard to build, and if you can build them, they have wonderful economic architectures. And I see no reason why our margin potential won't look like other good marketplaces over time. ... And as we grow, we do think the margins will look very attractive and in line with other marketplace companies.
The best comparison in online marketplaces, of course, is none other than eBay (EBAY 1.33%). The platform boasts some lucrative profit margins: In its fourth quarter, eBay boasted a 25% operating margin and a 31% operating margin on a non-GAAP basis. With operating profit margins like these, the company has a fat net margin, too. Of eBay's $2.6 billion in fourth-quarter revenue, $618 million fell to its bottom line when excluding the one-time impact of the Tax Cuts and Jobs Act.
Notably, eBay has also been able to improve its operating margin consistently over the years. Its operating margin has risen from 21% in 2013 to about 24% for the most recently reported 12-month period. As Silverman said, "One thing I admire about marketplace models is that they get better as they get bigger."
Hopefully, Etsy investors can look forward to similar long-term margin potential.
