Etsy's (ETSY -2.19%) stock recently tumbled 16% after the online crafts and artisan goods marketplace posted its third-quarter results. The company's revenue rose 31.6% year over year to $197.95 million, beating estimates by $4.4 million. Its GMS (gross merchandise sales), the value of all goods sold across its platform, rose 30.1% to $1.2 billion.
Etsy's adjusted EBITDA increased by 23.6% to $42.1 million, but its net income dropped 25.6% to $14.8 million, or $0.12 per share, which merely matched analysts' expectations. Its adjusted EBITDA margin also declined 130 basis points annually to 21.3%. Those results were mixed, but was the sell-off justified?
Slowing revenue growth and lower margins
Etsy's revenue growth decelerated significantly over the past year as its adjusted EBITDA margins declined:
Metric |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
---|---|---|---|---|---|
Revenue growth (YOY) |
41.3% |
46.8% |
40.1% |
36.8% |
31.6% |
GMS growth (YOY) |
20.4% |
22.3% |
18.9% |
21.4% |
30.1% |
Adjusted EBITDA margin |
22.6% |
25.7% |
29.4% |
21.9% |
21.3% |
Etsy's revenue and GMS in the third quarter also included its Mid-August acquisition of musical instruments market Reverb. Reverb boosted Etsy's total revenue and GMS, but it has a take rate (the revenue retained from each transaction) of just 7.9% compared to Etsy's 17.1%.
As a result, Etsy's total take rate dipped from 16.5% in the second quarter to 16.4% in the third quarter. Reverb isn't profitable, but Etsy expects it to achieve breakeven EBITDA by the end of 2020. Therefore, buying Reverb helped Etsy beat Wall Street's top-line estimates, but Etsy is sacrificing its near-term take rate and margins.
Etsy also noted that its sellers aren't significantly hiking prices to offset its new free shipping guarantees, and that new sales taxes for online purchases were throttling its growth. Nonetheless, Etsy's active sellers still grew 27% year over year to 2.6 million as its active buyers rose 21% to 44.8 million. That growth indicates that Etsy still enjoys a first mover's advantage in the artisan space against aggressive competitors like Amazon (AMZN 0.80%) Handmade.
Etsy retained its lead over Amazon with a streamlined platform that helps shoppers find niche handmade items, its use of flexible "per listing" fees instead of Amazon's monthly fees, and liberal policies regarding links to personal sites, mailing lists, and other promotional tools, most of which are banned on Amazon.
Etsy is also generating fresh revenue from the new Etsy Ads platform, which merges its own Promoted Listings and listings on Alphabet's Google Shopping onto a single, unified platform. Like Amazon, Etsy could eventually leverage its strong position in product searches to build a successful secondary advertising business, but that revenue won't meaningfully boost its full-year EBITDA yet.
Solid guidance... with a minor flaw
Etsy also raised its revenue and GMS guidance for the full year, but it slightly reduced its adjusted EBITDA margin guidance from a range of 22%-24% to a new band of 22%-23%.
Metric |
2017 |
2018 |
2019 Guidance |
---|---|---|---|
Revenue growth (YOY) |
15% |
21% |
34%-35% |
GMS growth (YOY) |
21% |
37% |
25%-26% |
Adjusted EBITDA margin |
18% |
23% |
22%-23% |
That reduction was minor, but it seemed to support the bearish thesis that Etsy may be relying more heavily on lower-margin businesses to drive its revenue growth. It also indicated that the stock's forward P/E ratio of 53 is still too lofty relative to analysts' expectations given 10% earnings growth this year and projected 25% growth next year.
Still a solid alternative to Amazon
Etsy is still a solid growth stock, and it's a good alternative e-commerce investment for investors who think Amazon is running out of room to grow. However, investors should note that Etsy's premium valuation doesn't leave it much room for mistakes -- so it's wise to nibble on this stock on the pullbacks to gradually build up a long-term position.