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Here's Why Etsy Stock Was Up 25% in May

By Jon Quast – Jun 5, 2020 at 10:33AM

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The company is selling way more than just face masks.

What happened

Shares of e-commerce company Etsy (ETSY 4.96%) were 24.8% higher in May, according to data provided by S&P Global Market Intelligence. And it's simple to explain the stock's return. The company started the month by reporting earnings. But it also provided second-quarter guidance based on sales trends, and it expects revenue to almost double from last year.

Lately, Wall Street is fond of e-commerce stocks because the COVID-19 pandemic pushed a lot of economic activity online. Etsy's results validate the thesis, and its stock is far outpacing the return of the market averages in 2020 as a result.

ETSY Chart

ETSY data by YCharts.

So what

Etsy's results for the first quarter of 2020 were strong. Quarterly revenue grew 32% year over year to $1.4 billion. And it had user growth for both buyers (up 16%) and sellers (up 26%). But in April, Etsy's business really took off. The Centers for Disease Control recommended the use of face masks to slow the spread of the coronavirus, and demand absolutely soared. 

CEO Josh Silverman comically described the situation in Etsy's Q1 earnings call. "[I]t was like waking up and discovering that it was Cyber Monday, except that everyone in the world wanted just one product, and that one product was in extremely limited supply." The company quickly adapted to accommodate the surge in demand by modifying the site's search function and reaching out to sellers.

If only demand for face masks had increased, then Etsy's business gains wouldn't be sustainable. But when excluding face masks, April sales were still up 79% from April 2019. All told, the company expects upcoming Q2 results to show an 80% to 100% year-over-year gain for gross merchandise sales. And it anticipates revenue growth of 70% to 90%.

After reporting growth like that, Etsy stock rode the momentum higher for the rest of the month.

A young man stares at a computer screen in surprised disbelief.

Etsy's CEO said it was like "waking up and discovering that it was Cyber Monday." Image source: Getty Images.

Now what

COVID-19 has impacted the economy, but investors need to separate the companies just seeing a surge in product demand from those seeing a surge in adoption. The former is likely temporary, while the latter could endure. I would argue Etsy's situation is the latter: The coronavirus has boosted the adoption of its e-commerce platform.

A wave of new buyers have tried Etsy, and it's up to the company to turn them into long-term customers. But its business is just as much about the sellers. By working directly with sellers to ensure an adequate supply of face masks and by spreading sales around after modifying its search function, it's plausible Etsy has shown them just how powerful the platform can be in growing their small businesses. If my hunch is correct, it's a reason to be bullish on the company's long-term prospects.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Etsy. The Motley Fool has a disclosure policy.

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Etsy, Inc. Stock Quote
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