Etsy (ETSY -2.17%) has had a mixed year on the stock market. During the first half of 2019, the company's shares gained over 50%, but they have been dropping like a rock since July, now down almost 15% year to date. Etsy's latest earnings report -- released on Oct. 30 -- made things even worse as investors were apparently displeased with the company's overall performance during the third quarter.
Such challenges are somewhat typical of a growth stock, though, and it would be a mistake to read too much into Etsy's volatile price movement.
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A solid performance
Etsy's financial results for the third quarter weren't bad, all things considered. The company showed growth and progress across the board.
First, the company continues to grow in popularity: Its number of active sellers and active buyers grew by 26.9% and 20.7% year over year, respectively. Second, this popularity is translating into more transactions on its platforms. Etsy's gross merchandise sales (GMS) -- the dollar value of the items sold on the company's platform -- increased by 30.1% year over year to $1.2 billion. Third, Etsy's revenue is still on a dazzling upward trajectory, jumping 31.6% during the third quarter.
The breakdown of the company's revenue growth between its two business segments -- marketplace and services -- was as follows: Marketplace revenue (revenue generated from sales transactions and processing) increased 27.1%, while service revenue (fees incurred by merchants for listing items on Etsy's platform) jumped 47.5%. Perhaps the ugliest metric in Etsy's earnings report was its bottom line, which decreased 25.6% year over year -- the company also posted shrinking gross margins. However, Etsy is investing in several initiatives to spur even more growth in the coming years, and that's as good a reason as any to post declining profits.
Etsy still has room to grow
Back in August, Etsy completed the acquisition of Reverb, an online marketplace for the sale of vintage musical instruments, for $275 million. While this move helped the company's top line and GMS grow, it also weighed on its bottom line (Reverb currently operates at a loss). Still, the acquisition fits well within Etsy's broad strategy, and management expects Reverb to become profitable next year.
The company is also currently looking to fine-tune its core platform in different ways, which should help promote even more growth. One such initiative is Etsy's efforts to improve its search algorithms to help buyers find the items they are looking for more easily. This may seem like a trivial thing to do, but it's important to remember that the bulk of the items sold on Etsy's platform are unique: That is, after all, one of the factors that attracts buyers to its platform.
Lastly, Etsy introduced free shipping for certain items during the third quarter, and during the company's latest earnings call, CEO John Silverman noted that 74% of Etsy's U.S. listings include a free shipping option. What effect does this new addition have? To quote Silverman:
Encouragingly, we've seen that the purchases per visit have increased as a result of the free shipping initiative. In addition, our recent buyer surveys show improved sentiment around shipping and buyers report higher future intent around visiting, shopping, and adding more to their cart.
With these new projects, Etsy can keep its momentum going in the coming quarters. That's why, despite the recent sell-off, investors shouldn't give up on the e-commerce company just yet.
