Etsy (ETSY -2.62%), the online marketplace that specializes in handmade and vintage goods, disappointed investors when it announced first-quarter results on May 5.
Although revenue and net income both soundly beat analysts' estimates, what captured Wall Street's attention most was management's admission that gross merchandise sales (GMS) growth would decelerate in the second quarter as the company laps last year's remarkable performance.
The stock slid over 16% on the news, wiping almost $3.5 billion off its market capitalization in 24 hours. But I'm here to tell shareholders not to worry. Here's why I believe Etsy is a stock investors should own, even after the sell-off.
Focus on the bigger picture
The Motley Fool prides itself on taking a long-term view when it comes to investing in the stock market. A lot can happen in any particular quarter, and market reactions are unpredictable, as was the case here. Last year was a boon for e-commerce businesses, so it shouldn't alarm investors when their growth cools off and slows down.
Etsy had a fantastic first quarter, though. GMS (up 132%), sales (up 142%), and profit (up 1,048%) all registered massive gains compared to the prior-year period. The business is clearly firing on all cylinders right now.
The market, as we know, is relentlessly focused on the next quarter, asking, "Can Etsy keep this crazy momentum up in a post-pandemic world?" Many companies, particularly in e-commerce, registered eye-popping growth in the spring and summer of last year. So naturally, as we begin to lap that performance in the next couple of quarters, the comparisons are going to be extremely difficult.
For the long-term investor, quarter-to-quarter lumpiness shouldn't matter. Although Etsy is predicting a slowdown in the current quarter with year-over-year GMS and revenue growth of 10% and 20%, respectively (at the midpoint), its competitive advantage and large market opportunity are still very much intact. Shareholders must ignore the noise and pay attention to this.
The marketplace is robust
One of the most important metrics to look at for an e-commerce platform like Etsy is the number of users. At the end of the most recent quarter, the company counted 4.7 million active sellers and 90.7 million active buyers. Both numbers are up meaningfully from just the previous quarter, demonstrating that the marketplace is still very much in high demand with users.
Engagement also matters. GMS per active buyer was up 20% year over year, while GMS per active seller was up 34%. Not only is Etsy attracting more users, but these people are engaging more with the company's service. It's no wonder the take rate (percentage of GMS that Etsy makes as revenue), which is currently at 17.5%, has steadily creeped up over time.
Additionally, the company is increasing its business outside the U.S. International markets accounted for 42% of total GMS in the quarter, up from 36% in the prior-year period. Etsy's penetration in India will certainly expand its addressable market significantly going forward.
If you were to simply look at the stock market's reaction to Etsy's latest results, you would probably be inclined to join the sellers and dump your shares quickly. But that would be a mistake as the underlying strength of the business shows.
Etsy is an outstanding operation. Its user and engagement growth put the spotlight on a leading e-commerce marketplace that will remain resilient thanks to network effects. And its market opportunity and international presence will only widen from here.
When Wall Street seems to be losing its head, keep calm and hold on.