There's an art to the craft of selling arts and crafts, and Etsy (ETSY -0.86%) has it down to a science. Shares of the online marketplace for hand-crafted wares hit another all-time high late last week after posting another blowout financial report.
Etsy's strong third-quarter results took out the previous highs set in mid-September. Etsy stock has now soared 154% in 2018, a whopping five-bagger since bottoming out in the springtime of last year. Momentum is on its side, so let's explore the reasons why investors keep bidding Etsy shares higher.
Image source: Etsy.
1. The beats keep coming
Consistently landing ahead of Wall Street expectations is one way to keep your stock moving higher -- as long as you're not merely beating hosed-down guidance. Etsy continues to tear the cover off the ball with every quarterly outing since bottoming out a little more than a year ago.
Etsy's 41.3% pop in revenue was just ahead of the 40.9% surge that analysts were modeling, but the real beat came at the other end of the income statement. Etsy's adjusted profit of $0.15 a share was more than double the $0.07 a share that Wall Street pros were targeting. Investors should be used to this by now, as the dot-com darling has crushed profit expectations with ease over the past year.
| Quarter | EPS Estimate | EPS Actual | Surprise |
|---|---|---|---|
| Q4 2017 | $0.09 | $0.36 | 300% |
| Q1 2018 | $0.06 | $0.10 | 67% |
| Q2 2018 | $0.04 | $0.07 | 75% |
| Q3 2018 | $0.07 | $0.15 | 114% |
Data source: Yahoo! Finance.
2. Sellers aren't rejecting the higher fees
Etsy took a gamble in June when it announced that it would be jacking up its selling fees. Merchants on the platform went from paying a transaction fee of 3.5% to 5% on successful purchases. A 150-basis-point move may not seem like much, but it adds up on a percentage basis.
Etsy mentioned during last week's earnings call that it has seen no material seller churn following the move to increase prices. It probably helps that Etsy has been investing some of the incremental fee revenue in enhancements that are helping with discovery and improving customer conversion rates. Etsy's big surge happened despite a modest 8% uptick in sellers, but that's more than offset by a better than 20% year-over-year increase in gross merchandise sales through the platform. In short, Etsy tested its pricing elasticity -- and won.
3. Analysts are buying into the momentum
Wall Street isn't always comfortable with a stock that has soared better than fivefold over the past year and a half, but they're not cooling on Etsy. At least two major analysts boosted their price targets on the stock instead of warning investors about a potential overvaluation situation.
Mark Mahaney at RBC Capital lifted his price goal from $45 to $52 on the strength of accelerating growth and margin expansion. He's sticking with his neutral rating on the stock -- his new target is essentially where the shares are now -- but he still came away impressed by the robust growth in sales on the platform and net active seller additions.
The more upbeat Laura Champine at Loop Capital boosted her price target from $57 to $65. She calls Etsy's guidance conservative despite the online marketplace operator once again boosting its forecast. She's cautious about Etsy's earnings growth next year in light of higher spending on marketing and other initiatives, but she sees the site continuing to engage buyers into more frequent purchases. Once again, Etsy's quarterly performance is a work of art.
