Etsy (ETSY -2.25%) has been one of this year's hottest stocks, and it will have to earn those gains this week as it steps up for its third-quarter results. The leading online marketplace for arts and crafts reports shortly after Tuesday's market close.
Shares of Etsy have more than doubled in 2018, up 109% despite correcting sharply since hitting all-time highs in mid-September. Tuesday's fresh financials -- Etsy's final earnings release during the calendar year -- will go a long way toward dictating whether Etsy remains one of this year's top gainers. Let's go over a few things the dot-com darling needs to get right this week.
1. The beats need to keep coming
You don't more than double in a calendar year without doing a few things right, and Etsy's been killing it with its quarterly updates. Revenue growth has accelerated for five consecutive quarters, up by a better-than-expected 30% last time out. Analysts were settling for a 24% top-line uptick.
Things are going even better at the other end of the income statement. Etsy's profit, adjusted for currency exchange fluctuations, clocked in at $0.07 a share, well ahead of the $0.04 the Wall Street pros were targeting. Etsy has landed ahead of analyst targets by at least 66% in each of the past four quarters. The stock's momentum dictates a steady diet of beats to keep the gains coming.
2. Guidance needs to lift higher
Etsy's fundamentals have been perpetually improving since it seemed as if the company was on the ropes in early 2017, when financial struggles, layoffs, leadership shuffles, and vulture-like buyout chatter were the headlines. The key to the stock's resurgence is that the prospects seem to get brighter with every passing financial update.
CEO Josh Silverman has bumped Etsy's full-year forecast for gross merchandise sales on the platform from 14% to 16% in February to between 16% and 19% in May to a range of 18% to 20% in August. A strong third quarter will ring hollow if it's not accompanied by a rosy outlook for the seasonally potent fourth quarter. Another bump in guidance should keep the rally going.
3. Artists need to accept the new fee structure
Etsy's revenue is growing faster than the sales on its platform, largely as the marketplace operator gets better at selling related services to the artisans who have set up virtual storefronts on the site. A 55% surge in services revenue helped prop up the 20% increase in gross merchandise sales in the second quarter.
Don't be surprised if Etsy's platform is ready to do more of the heavy lifting. Etsy announced in June that it will increase its selling fees. Sellers are now paying a transaction fee of 5%, up from 3.5% before the late springtime announcement. Going form 3.5% to 5% may not seem like much of a move in terms of basis points, but it's a big jump on a percentage basis. Tuesday's report will cover the first full quarter of the new fees, and if the artisans on the platform don't flinch, it should result in a material increase for Etsy's bread-and-butter fee revenue.