Why Etsy Is Cratering After Q2 2019, and Why Should Investors Stay the Course?

An acquisition and a deceleration in services revenue hold the key to understanding the short-termism regarding the e-commerce website.

Nicholas Rossolillo
Nicholas Rossolillo
Aug 12, 2019 at 12:07PM
Technology and Telecom

Even after a steep stock price dip following the second quarter of 2019, Etsy (NASDAQ:ETSY) isn't doing too badly. The stock is still up 15.4% year to date, and business remains solidly in the realm of double-digit growth. Granted, a cool-off wasn't out of the question -- shares were sporting about a 43% gain headed into the Aug. 1 earnings report -- but the sell-off since then seems overdone, as other recent Etsy sell-offs have been.

Expanding on a popular e-commerce niche

Gross merchandise sold (GMS) on the e-commerce website's platform accelerated to 21.4% during Q2 2019, up from 18.9% in the first quarter of the year. Pairing that with its merchant transaction fee increase, put in place in July 2018, marketplace revenue has soared 45% higher through the first half of the year. As the seller turmoil created by Etsy's transaction fee hike last summer has started to settle down, GMS and related revenue increases should go more along the same lines from here on out. That means somewhere in the 20% to 22% range for the balance of 2019.

Metric

Six Months Ended June 30, 2019

Six Months Ended June 30, 2018

Change

Marketplace revenue

$261 million

$179 million

45%

Service revenue

$88.1 million

$72.1 million

22%

Data source: Etsy.

The lesser half of the revenue equation -- services -- decelerated to 16%, a sharp decrease from the 29% pace in Q1. It feeds into management's outlook for moderating revenue growth in the 32% to 34% range by year-end. Thus the slowdown in service revenues helps explain why the stock fell. Still, it all added up to a pretty good first half of 2019 for Etsy, one in which the company is enjoying profitable expansion, as new buyers and sellers flock to its marketplace for homemade and small-business wares.

Metric

Six Months Ended June 30, 2019

Six Months Ended June 30, 2018

Change

Gross merchandise sold

$2.12 billion

$1.76 billion

20%

Revenue

$350 million

$253 million

38%

Operating expenses

$190 million

$140 million

36%

Earnings per share

$0.38

$0.13

192%

Adjusted EBITDA

$89.6 million

$54.1 million

66%

EBITDA = earnings before interest, taxes, depreciation, and amortization. Data source: Etsy.

A champion of small entrepreneurship

Even after shares sank, Etsy stock trades for 45.7 times the last 12 months' worth of free cash flow (basic profitability after operating and capital expenses are paid for), and 40.9 times forward earnings. This is no cheap stock, as investors expect the current pace of bottom-line increase to continue for some time.

A closeup view of a painting with paintbrushes lying on it

Image source: Getty Images.

As mentioned, though, Etsy's management sees the value of merchandise sold on its platform rising at least 20% this year, as activity in its marketplace keeps growing with new buyers and sellers. Etsy is spending on marketing and merchant advertising tools to keep that metric on the rise, and other services like free shipping are expected to keep service activity in support of merchants headed north as well.

Perhaps the biggest news, though, was the recently announced $275 million acquisition of Reverb, a marketplace for new, used, and vintage music equipment. As Etsy had $359 million in cash and $275 million in short-term investments at quarter-end -- and free cash flow is on the rise and running at $157 million over the last 12 months -- the addition should give future earnings a boost.

Thus, though the stock's performance has been ugly after the most recent report, investors should stay the course and treat the pullback as a buying opportunity. Etsy is doing just fine, and all indications are that it will continue to do so for the foreseeable future.


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