The market giveth and the market taketh away.
Growth stocks were the biggest winners of the pandemic rally last year, but many of the hottest names that got tailwinds during the health crisis have faded, with some popular growth stocks now down more than 50% from their previous peaks. Investors seem to believe that valuations have gotten stretched, and many have rotated amid cyclical and value stocks, banking on a strong recovery when the economy fully reopens. Earnings season has further reinforced this sentiment with many popular growth stocks diving in spite of impressive quarterly results.
However, some high-quality companies have gotten thrown out with the bathwater, making right now a great time for growth investors to go shopping. In particular, Etsy (ETSY 1.93%) and Redfin (RDFN -5.64%) look ripe for new purchases.
Etsy takes a breather after an incredible year
Shares of Etsy (ETSY 1.93%), the online marketplace for handmade, vintage, and craft goods, took a dive on Thursday in spite of another blowout earnings report. Etsy posted first-quarter 142% revenue growth to $550.7 million, and, even better, earnings per share surged by a factor of 10 from $0.10 to $1.00, showing the leverage in its marketplace model. Both numbers beat analyst estimates, but the stock fell 14.6% on second-quarter guidance. After posting four straight quarters of triple-digit growth, Etsy is now lapping that performance and dealing with some headwinds from the reopening. As a result, management sees revenue growth slowing to 15% to 25% in the second quarter.
While that mean seem concerning, let's take a step back and consider all of the factors in the company's favor.
First, e-commerce sales are going to decelerate as they lap the pandemic-driven surge of the last year, but there's still fundamental long-term momentum that will drive online sales higher as delivery gets faster, technology gets better, and shoppers become even more accustomed to e-commerce. Etsy has seen a boom in new buyers and sellers on its platform, a sign that brand awareness and engagement has surged as well. Active buyers on the platform nearly doubled to 90.7 million over the last year, and active sellers rose by 67% to 4.7 million.
Finally, the surge in profits shows the scalability of the company's marketplace model, and profit margins should only get better over the long term. Down nearly 40% from its recent peak, Etsy shares are starting to look like a bargain.
A real estate disruptor seizes an opportunity
Like Etsy, Redfin has been a pandemic winner as the housing boom has led to strong growth for the digital real estate brokerage. Redfin posted 40% revenue growth in its first quarter to $268 million, and gross profit more than tripled, showing the business is gaining leverage. Its market share of U.S. existing home sales ticked up 21 basis points from a year ago to 1.14%, showing it's steadily penetrating the residential real estate market, but also that it still has a huge opportunity in front of it.
After initially furloughing agents during the early stages of the pandemic, Redfin has ramped up hiring and is now "hitting on all cylinders," according to CEO Glenn Kelman. To further expand its market opportunity, the company acquired RentPath, a rental listings company, in early April, and Redfin is calling for 109% to 114% revenue growth to $446 million-$457 million in the current quarter as it laps the weak second quarter from a year ago. However, investors punished the stock for forecasting a loss in the current quarter when analysts had expected a small profit. Part of the reason for that is the RentPath acquisition, which will add a $9 million to $10 million net loss in the quarter, but the bigger reason is that the company is investing in the growth of the business at an opportunistic moment. The company is ramping up marketing spending to take advantage of the spike in demand, and its headcount has also surged.
Given Redfin's progress in gaining market share, growing revenue, and improving profitability in a massive market, that spending seems like a worthwhile investment. Yet the market pushed the stock down 15.7% for forecasting a loss for the current quarter.
That seems like a mistake. The stock is now down nearly 50% from its recent highs despite a real estate boom and revenue that's expected to double in the current quarter, and should remain strong for the duration of the year as its iBuying program reaccelerates. Now looks like a great opportunity to pick up shares of this real estate disruptor.