What happened

Shares of Etsy (NASDAQ:ETSY) dropped 21.2% in August, according to data from S&P Global Market Intelligence, as the market reacted to the vintage- and handmade-centric e-commerce site's second-quarter results.

To be sure, virtually all of Etsy's plunge came at the start of last month, with the stock down 20% in the two trading days after its quarterly update hit the wires. But that's not to say Etsy's performance looked bad at first glance.

Person holding tablet flat on his fingertips with a digital shopping cart sitting on the surface.


So what

To the contrary, Etsy's second-quarter revenue grew 37% year over year to $181 million, translating to net income of $18.2 million, or $0.14 per share (up from $0.03 per share a year earlier). Analysts, on average, were modeling slightly lower earnings of $0.13 per share, but on slightly higher revenue of $183 million.

Still, Etsy CEO Josh Silverman called the company's growth last quarter "excellent," crediting "solid execution across [Etsy's] portfolio of product and marketing investments and the strength of [its] core marketplace."

So why the decline?

First, it's worth keeping in mind Etsy stock was already up 45% year to date leading into its announcement, leaving some traders more than willing to take profits on the heels of a technically mixed report.

It also didn't help that growth in Etsy's services revenue -- up 16.2% year over year to $45.9 million -- decelerated significantly from the 29% increase the same segment achieved in Q1. Marketplace revenue, on the other hand, soared a whopping 47.2% to $181.1 million, while gross merchandise sales (GMS) grew 21.4% to $1.095 billion.

Now what

Etsy also boosted its full-year guidance for both GMS (up 20% to 22%, versus an 18% to 21% growth target before) and revenue (up 32% to 34%, an increase from 30% to 32% previously), while simultaneously reducing its outlook for adjusted EBITDA margin to be 22% to 24% (down from its old range of 23% to 25%).

To blame for the latter, according to Etsy management during the subsequent conference call, was the "short-term absorption of zero-margin revenue" stemming from the company's new unified advertising platform. Over the longer term, however, that platform should also allow the company to make greater investments toward "upper-funnel" marketing channels (think television and digital video) to increase brand awareness and -- in turn -- drive incremental growth over the longer term.

For investors willing to buy on the pullback and watch this story play out, I think Etsy could be one of the most compelling portfolio candidates our market has to offer today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.