Despite strong first-quarter results, Etsy (ETSY -1.99%) shares fall 14%. Meanwhile, PayPal Holdings' (PYPL -1.84%) stock gets a boost after first-quarter payment volume exceeded results from the holiday quarter. In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Alicia Alfiere analyze those stories, along with Zynga's (ZNGA) strong quarter and acquisition of ad-tech company Chartboost.

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This video was recorded on May 6, 2021.

Chris Hill: It's Thursday, May 6. Welcome to MarketFoolery. I'm Chris Hill. With me today, Alicia Alfiere. Good to see you.

Alicia Alfiere: So glad to be here.

Hill: We've got mobile gaming, we've got the war on cash, but we're going to start today with e-commerce. Etsy's first-quarter profits and revenue were both solidly higher than expected, but you would not know that from what is happening to the stock today. Shares of Etsy falling 14%. I'm assuming this is just based on valuation, because there didn't seem to be any big red flags in their results.

Alfiere: We can talk about the results in a second. What I would say is that it looks to me like the stock price is really reacting to some of the guidance that's coming up. They're going to have some a little bit more difficult year-over-year camps coming up because they did so well last year. Remember, we had all of the masks on their platform that everyone was looking to buy. I think that's really what's causing that. But if we talk about the results, I'll take a step back and just explain what Etsy is. Etsy is the e-commerce platform for unique handmade and vintage products. Its brand is so unique that the 2020 survey of Etsy buyers found that 88% of buyers agreed that Etsy has items that you can't find anywhere else. When we look at e-commerce platforms, we try to look at the strength of the platform and of their network.

In terms of sellers, they saw an increase of sellers this quarter. So was about 67% increase year-over-year to total 4.7 million sellers. Active buyers, so people who have been on the platform at least once in the last year, increased almost 90% year over year to total 90.6 million buyers. A lot of growth here. Also what we like to look at are how often those buyers are engaging with the platform. For that, we look at what Etsy calls habitual buyers, which are buyers who spent $200 or more and had six or more purchases in the last 12 months. I'm one of these buyers. There has been growth in these buyers, it was actually the fastest growing segment for the company. In this first quarter, this group grew 205% year-over-year. We're talking about big growth here. In terms of revenues for the company, increased 141% to a total of $550 million and they're really profitable. Net income was $143.7 million in the quarter, and that's up from 1$2.5 million last year. For the percentage increase, it's wild, it's a 1,048% increase, which is incredible.

Hill: That's a ridiculous number. Did you get any color from Etsy in terms of their costs and in particular their marketing spend because it strikes me? I forget who I was talking to recently about Airbnb, but might have been Andy Cross. But someone was making the point that Airbnb benefits from not really having to do a ton of advertising because the brand is so well known. People know just to go to Airbnb. It strikes me that Etsy might be moving toward that same position.

Alfiere: I would agree. That's actually a really good question. Etsy, like Airbnb, actually started a campaign recently to just try to let more people know about their platform. For Etsy, the ad campaign was called Meant For You. What it's doing is it's meant to show off the uniqueness of the seller's products and the ability for people to personalize and really customize products, which is something that I think is so unique to Etsy itself.

Hill: This is a stock that even with the drop today and if you're a shareholder, that doesn't feel good. It never feels good to see a stock drop 14%. But it has doubled over the past year, even with this drop. Do you look at what's happening today as a buying opportunity for people who have had Etsy on their watch list?

Alfiere: Well, for me, I like to look at the underlying fundamentals of the business. Like we just talked about, they're seeing growth in both sellers and buyers. The engagement on the platform like we talked about. Those habitual buyers like me, those people are continuing to be active on the site. I think when you have those strong fundamentals and you start to see a little bit of declines, hey, it's like your favorite thing is on sale. Why not?

Hill: Why not, indeed. Shares of PayPal up a bit on their first-quarter result. Profits and revenue came in higher than expected. This is the thing that stood out to me. Payment volume for PayPal in the first quarter was higher than it was in the holiday quarter. To my recollection, that doesn't typically happen.

Alfiere: It was definitely surprising. This was another company that had a really strong first quarter. I think they called it their strongest first quarter. For people who aren't aware, I think everyone pretty much knows what PayPal is, but they're a payment processing platform. They have their PayPal platform and the Venmo app. As we talked about, payments increased and also the number of new active accounts. They added 15.5 million net new active accounts and they ended the quarter with 392 million active accounts, that's up 21% year over year. Transactions, like we talked about, they're at about $4.4 billion and that's up 34% year over year. Total payment volume, $285 billion up 46% on a foreign exchange neutral basis. Talking about really growing their platform, for the company itself, revenues are up. It's about 29% year over year, which is $6 billion for the quarter. Net income is also up. Gap earnings per share, so was $0.92 in this quarter and that's up from just $0.7 just a year ago. Incredible growth here.

Hill: With PayPal, there are plenty of businesses that we've talked about on this show over the past couple of months, where part of the narrative is along the lines of, well, they've had a great past 12 months. But as the world starts to open up, people are going to be filling in the blank less. With digital payments, it's hard to imagine that PayPal takes a step back in terms of their business because even with the world opening up and maybe even, especially because the world is opening up, I don't know of anyone who's saying, "I don't know about this digital payment thing. I really think cash is going to make a strong comeback."

Alfiere: Agreed. I think digital payments are here to stay. PayPal does a really good job of continuing to evolve to meet their consumer needs. Some interesting things that they've been doing. Crypto is certainly an area that they're evolving to meet their customer needs. PayPal now allows customers within the U.S., except Hawaii, to buy, sell, and hold cryptocurrencies with PayPal. Now what they've also allowed is customers can actually make payments among all 29 million businesses that accept PayPal with cryptocurrencies. It's called Checkout with Crypto, which is pretty cool. Then actually, now this is really interesting, on the call, they announced plans for what they're calling a next generation digital wallet. They didn't give a lot of detail to what it is. So far, they've described it as an all in one personalized app to help users make the most of their money and better their financial lives. I can't wait to see what this is. I am definitely intrigued. What do you think? An all in one app, that sounds great.

Hill: It does, although to me it's another sign of Dan Schulman, the CEO, just being good at this particular part of his job and he's good at most, if not all, parts of his job. But I think Schulman does a great job every quarter of talking straight about the business, what they've done over the previous three months, where they're going over the next three to 12 months and beyond, and teasing out stuff like this in a way that isn't too cute by half. He does it in a way that I think gets you interested. But I also don't blame him for not giving away the story in terms [laughs] of the details because things can change. You can have partners lined up on certain things, and then for whatever reason, they fall through. By the way, it is a sign of what's happening with, as a group, the Nasdaq stocks, that PayPal had, all the results that we just talked about, this incredibly bright future. The stock is up 2%. It's a sign of how much this company has grown and how well this stock has performed over the past year that it's like yes, all this greatness gets you a 2% rise in the stock.

Alfiere: Yeah, pretty much. But like Etsy as well, they're going to start seeing a little bit of a tougher year-over-year comparison starting next quarter, but definitely some bright spots ahead. Like you said, he gave us just enough. I feel like I've seen a preview for the summer blockbuster. It's intriguing, but I'm not 100% sure what kind of movie it is.

Hill: Yes, because you don't want it to be one of those teaser trailers that gives away the entire movie.

Alfiere: Exactly.

Hill: Then you're like, "I don't need to watch this now." One quick programming note, few topics are hotter in the financial world than real estate, and that is why Matt Argersinger is going to be our guest on Motley Fool Money this week, so check that out this weekend.

Let's move on to Zynga's first quarter revenue, which was nearly 70% higher than a year ago. Zynga makes mobile video games. They also raised their guidance for the full fiscal year, share is up about 5% today.

Alfiere: It's another company with a historic quarter. We've picked all these companies to talk about with historic quarters. Zynga reported its highest ever revenue for a quarter at $680 million. Like you said, that's up 68% year-over-year. Just so you know, some of the games that Zynga makes include FarmVille, Harry Potter games, and my mom's personal favorite, Words with Friends. Actually, a lot of their growth was due to some of those strong performers, including, this was interesting, their social slots game portfolio, which includes Hit It, Rich! slot. I didn't realize that that was such a big driver here. They also have record numbers for their users. Their average mobile daily active users was up 85% year-over-year to total 38 million. Their average mobile monthly users were up 139% year-over-year to total 164 million. Just massive amounts of users.

Rollic, which they recently acquired, it's a hyper-casual game developer which are easy to play mobile games that have appeal for broad audiences. Year over year, Rollic has more than tripled its quarterly installs and now stands as one of the top five hyper-casual game publishers in the U.S. That is one of the really exciting trends that Zynga is seeing. They have this big growth with hyper-casual. Later this year, they're releasing Star Wars: Hunters game, which is their first cross-platform play title. What that means is that it's a game where players can use different hardware to play each other, so not just on a mobile platform. The most interesting thing I think that's happening is that Zynga announced their plan to acquire Chartboost, which is a mobile ad and monetization platform.

Hill: There were two things I wanted to get to, and that was one of them, because for all the greatness of Zynga's quarter, I almost feel like all of it is overshadowed by the fact that they are spending $250 million on an ad tech company. Walk me through the rationale for this.

Alfiere: Yeah. There are a few different avenues that I think are interesting. Let's talk about the two most important for me anyway. Chartboost, what they can do is they can increase Zynga's reach. We talked about their monthly active users, which was about 164 million. With Chartboost, they could increase their reach to an audience of 700 million people, and it also gives them access to a network of advertising partners. They have the potential to get more people into their games, which is really exciting. The second part of this, which I'm finding really interesting, is that Zynga expects that this acquisition is going to help them navigate Apple's plans to limit some of the tracking and ad targeting on the mobile devices. It should be a pretty interesting acquisition. It's not expected to close, I don't think until the third quarter. But yeah, I'm intrigued by this acquisition, and excited.

Hill: Well, and I'm assuming if this were a horrible mistake, the stock would not be up 5% today. The fact that they're spending this money, which for Zynga this is not a small check to write, so I'm assuming there are plenty of analysts on Wall Street who agree with you that this is something that could pay dividends down the line. The second thing I wanted to get to with Zynga was, Ron Gross and I talked a little bit about this yesterday with respect to Activision Blizzard, there are those businesses and I think video games, streaming video are in this group that people look at them and say, "Look, when the world opens up again, when America opens up again later this year, particularly over the summer, people are going outside, they're not going to be sitting on their sofa watching Netflix or Disney+, and they're not going to be playing video games as much." I don't want to say Zynga is immune from that, they're a mobile game company. It seems like that is both an opportunity for Zynga over the next six months, and maybe it raises the bar for them as well. I don't know, what do you think?

Alfiere: I think this is a great question. But you're right, they're different because they have a lot of these mobile games. If I go out and meet friends, if I ride the metro, guess what I have with me? I have my phone. When I'm bored traveling somewhere, I could just take up my phone and start playing some of these games. Again, they're easy to play, so why not? At the same time, like we talked about, they're doing this cross-platform play title, and so that's going to allow them to even get into different gaming, to be able to compete more with some of those console games as well. To me it feels like the best of both worlds or it could be.

Hill: Time will tell. Alicia Alfiere, always great talking to you. Thanks for being here.

Alfiere: Thanks for having me.

Hill: As always, people on the program may have interest in the stocks they talked about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you on Monday.