Can Etsy Take Advantage of Its Coronavirus Momentum?

As the calendar turned to 2020, no one would have guessed that coronavirus masks would be the hottest selling item on Etsy's (ETSY 0.49%) website.

Artisan sellers capitalized on the opportunity to make unique handcrafted masks that attracted millions of new and repeat buyers. This unexpected shot of adrenaline helped propel the company to its best quarter ever, but can this handcrafted online marketplace sustain its momentum? 

The best quarter on record 

Coming into the earnings call, expectations were high, but the actual results came in even higher. Management guided for year-over-year gross merchandise sales (the value of all goods sold on its marketplace) growth of 80% to 100% with revenue up 70% to 90%. But Etsy actually delivered a record $2.7 billion in gross merchandise sales (up 146%) for the second quarter, and revenue came in at a record $429 million, up 137% year over year.

Beyond the $346 million in coronavirus mask sales generated in the second quarter, three of its six top product categories (excluding mask sales) saw triple-digit year-over-year gains.

Handmade coronavirus masks have boosted revenue and attracted buyers to Etsy's marketplace. Image source: Getty images

This amazing top-line performance lifted the bottom line to new heights as well. Net income surged 429% year over year to a record $96 million. Its operating cash flow of $250 million also provides management with flexibility in how to leverage the more than $1 billion of cash and marketable securities on Etsy's balance sheet.

But this record quarter wasn't just an overnight success -- it wouldn't have been possible without years of platform improvement efforts.

A mission-centered approach

Etsy's mission is to "keep commerce human," and management has spent considerable time and effort working on four mission-aligned initiatives to improve its platform. The first is building "world-class search and discovery technology." Etsy is utilizing artificial intelligence and machine learning, favorites and list functions, and a newly launched saved search capability. All these efforts are focused to better understand buyers and connect them with personalized items that they'll love.

The second effort is to improve the seller's ability to highlight their brand and products. The company recently added capabilities for product videos, and within the first few weeks after launch, there are already over 700,000 videos for buyers to view items in a new way.

The third initiative is around building a trusted brand with transparent, fast, and free shipping. With a cart of $35 from a seller, buyers can get their items shipped at no charge. A new feature that's shown early promise lists items from the seller the buyer might like that would allow them to get free shipping.

The last initiative is to better highlight Etsy's unique collection of handcrafted items. An example is its use of augmented reality to allow buyers to see how items from the wall coverings category would look inside their homes. These are just examples from a long list of improvements that have been launched or are in the planning stages.

A platform that's bigger and better

Today, Etsy's marketplace connects more people than ever. The table below shows the dramatic user growth over the last several years.

Data from Etsy's press releases. Table by author.

Active buyers and sellers include anyone who has made at least one purchase or sale with Etsy in the last 12 months. Since 2017, the platform has doubled its active buyer count, making it an increasingly attractive market for sellers. Active sellers increased more than 70% in the same period, and the gross merchandise sales on the platform almost quadrupled as well.

But the company isn't just seeing an increase in the number of people using the platform -- it's creating more loyal buyers and bringing more value to sellers. Repeat buyers who have made purchases on two or more different days in the last 12 months increased 51% year over year in second quarter to 26 million. Habitual buyers who have made six or more purchases on different days in the last year increased to four million, an amazing 64% increase. Active buyers spent 5.9% more this quarter than in the prior-year period, and the average active seller achieved 15% more in gross merchandise sales than they did last year.

These results show that Etsy's ecosystem is becoming stronger as a result of the coronavirus -- and that bodes well for the future.

What's ahead for Etsy?

Management is expecting third quarter revenue to grow between 80% and 115% year over year, demonstrating its remarkable growth isn't coming to an end. The pandemic-driven momentum has provided investors with exciting near-term results, but the benefits of attracting new buyers and sellers to the platform will reverberate long into the future.

With management's focus on building a better platform, their commitment to sellers, and their proven ability to execute, shareholders should rest easy that this growth stock will still be a solid investment, even if masks are no longer a hot item.