Shares of Etsy (NASDAQ:ETSY) have rallied almost 200% over the past 12 months as the company's sales growth accelerated, and it posted stable profits. That rally crushed the bears, who believed that Amazon (NASDAQ:AMZN) Handmade would render Etsy's artisanal marketplace obsolete.
Etsy held its ground against Amazon with its first mover's advantage, a welcoming platform that only charged listing fees after 40 free listings (compared to Amazon's monthly fees), and a streamlined shopping platform that helped customers find niche products.
Unlike Amazon, Etsy lets sellers provide links to personal sites, build mailing lists, and build their brands with other promotional features. Meanwhile, Lucky Break Consulting -- which discourages sellers from using Amazon Handmade -- calls Amazon a "dictatorial platform that exerts almost total control over the sales process, stripping sellers of virtually all autonomy."
Meanwhile, Etsy has consistently grown its base of sellers and buyers. Analysts expect that momentum to persist with revenue rising 34% this year.
But is Etsy stock still worth buying at its all-time highs?
7 reasons to buy Etsy
Etsy's revenue rose 30% annually to $132.4 million during the second quarter, which beat estimates by $5 million and marked the company's fourth straight quarter of accelerating sales growth. Its marketplace revenue rose 21%, and its services revenue climbed 55%.
GMS (gross merchandise sales) rose 20% annually to $901.7 million last quarter, which marked the company's fourth straight quarter of sequential acceleration.
The number of active sellers rose 8.1% annually to 1.98 million last quarter, as the number of active buyers climbed 17.2% to 35.83 million. Both figures compare favorably to the company's 9.4% growth in sellers and 16.9% growth in buyers during the first quarter.
Consistent growth enabled Etsy to boost its transaction fee from 3.5% to 5%. Etsy believes the fee, which went into effect in mid-July, will "support additional investments in the growth and health of the marketplace."
The company raised its full-year sales guidance from 32% to 34% growth to 33% to 35% growth. It also expects its GMS to rise 18% to 20%, compared to its prior forecast for 16% to 19% growth.
Gross margin expanded 80 basis points annually to 65.7% last quarter, and its gross profit rose 31.8% to $87 million. It also reduced its operating expenses by 4%. As a result, adjusted EBITDA more than doubled to $27.7 million. It expects its adjusted EBITDA to grow 55% to 70% for the full year.
Etsy has remained profitable on a GAAP basis for six straight quarters. Its net income fell 71% annually to $3.38 million (or $0.03 per share, which missed estimates by a penny) last quarter, but the drop was mostly due to currency fluctuations and a big tax benefit in the prior year quarter.
2 reasons to sell Etsy
Over the past few years, Etsy started allowing sellers to work with manufacturers to mass-produce their "handmade" goods. This strategy boosted its growth but also opened the door to questionable third-party resellers.
If Etsy continues to let those sellers in as it raises fees, it could alienate some of its older sellers and buyers. It would also blur the lines between Etsy and Amazon, and possibly cause Etsy to lose its niche appeal.
The stock already has a lot of growth priced in. It trades at nine times this year's sales. On the bottom line, it trades at over 90x this year's earnings.
By comparison, Amazon trades at three times sales and just over 70x earnings. Amazon also isn't cheap, but it arguably has a much wider moat than Etsy in the e-commerce market.
The verdict: Buy Etsy (but be cautious)
I think Etsy's accelerating sales growth, stable bottom line expansion, and defensible niche could lift the stock to new highs. However, investors should be wary about the stock's lofty valuation and the company's muddy rules regarding manufactured goods. Therefore, I might nibble on the stock at these prices, but I'd wait for a bigger pullback to buy more.