In this episode of Industry Focus: Tech, host Dylan Lewis welcomes Motley Fool contributor Brian Feroldi to talk about fresh earnings results from MercadoLibre (MELI -10.38%), Square (SQ 16.13%), and Etsy (ETSY 4.76%). Brian and Dylan break down how Bitcoin was a huge driver for Square this quarter, why digital payments are becoming an unavoidable part of the thesis for MercadoLibre, and why Etsy sunk on seemingly strong results.

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This video was recorded on May 7, 2021.

Dylan Lewis: It's Friday, May 7th, and we're talking three Fool favorites that just reported earnings. I'm your host Dylan Lewis, and I'm joined by's premium prospector for picturing potential purchasing power, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: Dylan, earnings week continues and we have tons of companies to pick through. Yet again, we had to pare down the list because there are just so many to talk about.

Lewis: It's an embarrassment of riches. I have to say, I don't have the portfolio that you have in terms of scope. I think you own maybe twice as many companies as I do. I have a hard time keeping track of just the businesses I own when it comes to earnings season, and I lean very heavily on our colleagues because they do a lot of great run-downs for us. We're hoping we can bring that to a lot of Fools who own a couple of different businesses we're going to be talking about today. Maybe make their lives a little bit easier, keeping up with all of the earnings that are flurrying around right now.

Feroldi: The secret to holding lots of stocks is to never invest alone. The best thing about The Motley Fool is the community aspect. Like you, I rely heavily on other people to help me cover all these earnings. Yes, that's my secret to being able to hold lots of stocks.

Lewis: Yeah, I like to think of it as that classic you see on online media, it's like, "We did this so you don't have to." [laughs] We dug through the earnings reports to save you time. We'll be giving you updates on Square, MercadoLibre, and Etsy, about 10 minutes each, giving you the quick download, everything you need to know. Brian, really, we're talking about our own book here. I mean, I own two of these companies, if I'm not mistaken. You own all three of these companies?

Feroldi: That's correct.

Lewis: Yeah. Actually, I think two of the three of these companies are in our April Fool's portfolio, which is a beginner portfolio that we put together as part of our company holiday, April 1st, for 2021. Folks, if you caught that, you can get some updates on that portfolio here, but also head over to and you can get 15 stocks, five funds, a nice little batch of companies, get your hands on, especially if you're a newer investor and are building out a portfolio for the first time. Nice kind of sense of how to do that. Certainly it's the kind of thing, Brian, that I wish I had when I started out investing, would've been helpful.

Feroldi: No doubt. I started investing almost 20 years ago at this point. The amount of resources, free resources, podcasts, videos, tutorials, articles that are available today is just incredible. It's the best time ever to be a new investor.

Lewis: The best time ever to be a new investor. It's also, I think, a particularly good time, if you have any exposure to Bitcoin as a business. [laughs] I've been amazed at what that tailwind has done for some companies recently. The first business that we're talking about, Square, had -- I think this isn't an exaggeration -- a blowout quarter. Just absolutely demolished expectations, and Bitcoin is a huge part of that.

Feroldi: Yeah. If you were to just look at this company's revenue, it's an eye-popping number. Revenue at Square was up 266% to $5.06 billion. Wall Street was only expecting $3.3 billion. So that was an absolutely massive beat on the top line. However, as you just alluded to, a lot of that is based on this company's entrance into the Bitcoin market. They are booking some of that Bitcoin transaction as revenue. That is actually very, very low margin revenue for this company. Moving forward, you can't just look at this company's headlines, you have to go one step further.

Lewis: Yeah. I think the past 12 months have shown us more very, very big companies posting absolutely insane growth rates. You need to take a step back when you see a number like 266%. Remember, Square is like a $100 billion business. How many times in history have we seen companies that post topline growth of that magnitude?

Feroldi: Yeah. I can't even think of any off the top of my head. That's including thinking of [...] and other companies that are just monster growers. Again, if you look one step further, Square is really starting to emphasize its gross profit numbers when you're looking at its shareholder letter. That's the thing that's big and bold and right in front of you. I really like that because gross profit strips away all the vagaries that are going on with the revenue and gets to here's how much gross profit we have to work with to fund the business. But let's take it back and just talk about the adjusted revenue headline. If you exclude the gains from the Bitcoin business, revenue here grew 44% to $1.55 billion. If you break that apart, transaction revenue was up 27% to $960 million. Subscription and service-based revenue, which includes things like the Cash App and the seller ecosystems, that was up 88% to $558 million. Another metric that's worth noting is just gross payment volume, which is all the transactions that have gone across the company's network. That was up 34% to $18.1 billion. Not the 266% revenue growth that the company reported on the topline, but still stellar results nonetheless.

Lewis: Yeah, darn impressive. Also, this is really the engine that's going to make this company go, going forward. This is the core business. I think it's amazing to see $3.5 billion in revenue coming through the Bitcoin transactions. I think that is remarkable. If you're a crypto person, you're probably like, "Heck, yeah." I've been waiting for people to really start catching onto the story. I think certainly in Square's case, they are seeing the benefits of being one of the early really big tech players to buy into the crypto space and say we're going to make this dumb simple for people. We're going to make it really easy for them to transact in crypto, if they want to.

Feroldi: They are doing just that, and Jack Dorsey, there's no doubt that he has been a massive bull on Bitcoin for years. But again, I think it's smart of this company to really emphasize gross profit, which, by the way, grew 79% to $964 million. That itself is a really great result, and they did go out of their way to say we expect revenue to be far more volatile now, which again makes sense while they're emphasizing gross profit. When Bitcoin is going crazy and that business is on fire, yes, revenue is going to grow. It doesn't take a lot of imagination to think that the opposite of that will be happening in some quarters in the future. Again, if you're just looking at the headline numbers, they'll report a year-over-year decline in revenue, and you'll be like, "What is going on with this business?" So just focus on gross profit like management does.

Lewis: I like the way you deconstructed that, Brian. Because when you have $3.5 billion in revenue coming out of, not quite nowhere, but coming out in an unexpected way, that's where you have the results of the company puts up, just totally being in a different direction and totally being so much larger than what expectations can be. We talk about it all the time with innovative businesses, and it's certainly true for innovative business segments as well. It's really hard to appreciate the value and really model it out in any consistency when you have that kind of growth happening. I know that the other day on our member live stream, Motley Fool Live, you did a breakdown I think it was of Coinbase, and you were talking about the crypto market in general. I think we can't think about it as cyclical as maybe some more classically cyclical industries, but this segment, at least for Square, is going to rise and fall with interest in cryptocurrency. It's just the way that that revenue stream is going to work for them.

Feroldi: It really is. It's going to be a thing that just makes the topline really hard to decipher and really hard to understand. To the point, management called out that, yes, while Bitcoin-related revenue was $3.5 billion, gross profit from their Bitcoin business was $75 million or about 2% of their Bitcoin revenue. Hence why they're saying don't focus on the revenue number, focus on the gross profit.

Lewis: Yeah. One of the things I like with what management laid out for shareholders in this quarterly update is basically saying we're seeing this really impressive gross profit growth and to help you understand why, we're seeing really incredible inflows on the platform. These are basically moving in lockstep for them.

Feroldi: They really are. They are growing very strongly across the board. Management did note that it's the stimulus packages that are going out to their customers is having an outsize influence on their growth in their inflows, especially among their Cash App business and the usage of cash cards. Those businesses are growing very strongly during the quarter. I think even if you were to strip those out, the results would still be pretty good, but there's no doubt that those government stimulus checks are really helping Square.

Lewis: Yeah. I think it traces back to a very similar philosophical approach that they've had with crypto and Bitcoin is let's make it really easy. They've mastered that and made it very simple for people to access their money. That's only going to benefit a business. I mean, the easier and the more friction you can remove from that kind of thing, the more customers are going to use you and continue to use you beyond the initial use case.

Feroldi: I think that's one thing that tech companies in general, or at least a really successful one, understand very, very well. They are super hyper-focused on the consumer experience, and they want to remove as much friction from the process as they possibly can. For example, this company was a big participant in the PPP loans that went out to their businesses last year, and they noted that they saw a huge demand for that. To your point, their mission is to help sellers and people access the digital economy. Their numbers clearly show that they are doing just that.

Lewis: Those are all the high-level numbers that we were traditionally checking on, but there were a ton of updates for this business, and there were a little bit more of the lower level things within the quarterly report. But a lot of things that are worth at least bringing into the conversation, Brian. What are some of the standout ones for you? Because I know in our outline alone for the show, there were about 15 bullet points related to things that happened during the quarter.

Feroldi: It really is hard to keep up with everything that's going on at this company because there is so much progress. One thing that's worth noting is that they completed the acquisition of TIDAL for $302 million, which is a global music entertainment platform. That deal brought Jay-Z to this company's Board of Directors. That's interesting. One thing that I did call out or two things that I think is worth mentioning. First off, they said that their Cash App now lets users send and receive Bitcoin from each other's for free. That is a nice perk that I think will resonate with a lot of users of their Cash App product. Again, to buy and sell through their other system, you do have to pay a transaction fee. But if you want to just send it back and forth between users, that is free. That could be a sticky product that keeps people loyal to the Cash App. The other thing that caught my eye here is how fast the international markets are growing. Gross profit in international growth grew 80% and now represents about 8% of total seller growing profit. They called out that they launched the Square Terminal in Japan. The Square Register was launched in both the U.K. and Australia. This company has predominantly been a U.S. story for now, and the international opportunity remains huge. So it's good for me to see that they're making progress there.

Lewis: Yeah. I think it's worth talking about the Cash App a little bit, Brian. You mentioned it in that rundown. I think if you went back maybe three or four years, you would say, when it comes to the mobile peer-to-peer payments, there's Venmo, and that's really it. They are by far the leader in the space. With all of those types of technologies, you wonder, with the network effects, is there really room for a second one to be downloaded and really heavily used? Or is there one that's just going to become standard for people and it's going to be tough for another player to make inroads? They have seen their users explode over the last four or five years, and they've done a really good job. I thought it was going to be a pretty uphill battle for them to unseat or equally get to the same point as Venmo. I think there's still some work to do there. But that's been one of the more impressive elements of the growth story for me because I honestly didn't think they were going to be able to pull it off.

Feroldi: I 100% agree with you there, given how behind they were. Products like Venmo, the Cash App has done a tremendous job about growing its user base. I like that Square really sees this as a core product for making finance easy for consumers, and they are investing aggressively to build out their ecosystem. The Bitcoin option that we just talked about to send and receive back and forth should only further deepen that. There's also things like the cash card that they have. They noted that there are now more than 10 million monthly cash card actives and more than seven million people use them weekly. Those are some impressive numbers. That latter figure, that seven million weekly, that was up almost double the year ago period. So this product remains on fire.

Lewis: Absolutely on fire. I think that this is precisely what we talk about when we say optionality. The business Square has changed so dramatically in the last five or so years. Every single time I check in on it, the more and more impressed I am with what they're able to do.

Feroldi: One other thing that was worth noting here is that Square is traditionally viewed as a product and service for really small businesses, but the company has been moving up the market and it continues to do so with great success. The company noted that their mid-market sellers, that business grew 43%, which was 2x growth of the total growth of sellers. They consider that to be sellers that will sell over $500,000 on Square's platform for the year. That's really great to see that not only are they having success with the little guys, but they are successfully moving up the market, because that will have an outsize impact on revenue and profits in the future.

Lewis: Brian, you mentioned that management is focusing a lot on gross profit specifically and that that's something that I think we can expect to get updates on and focus on in the coming quarters with this company. It was also something that they specifically called out in the guidance that they provided for investors.

Feroldi: Yeah, they didn't give us incredibly detailed guidance, but they did note that they saw continued strength into April of this year with gross profit in the seller ecosystem growing by more than 135% over the prior year, and Cash App was also up 130% year-over-year in April. Management did note that they are seeing a slowdown or they at least expect to see a significant slowdown in May, in June as they start to come up against those really tough comps. They did say that they expect expenses to remain high. While they are not giving absolute guidance, it is at least a good sign that that triple-digit growth rate has persisted into April.

Lewis: Yeah. I can see how, for them, it's a little bit tough to forecast too much out because of a lot of the things that we've talked about before. I'll say I'm looking at them as a shareholder and I am saying, "Core business grew at about 44%. You add Bitcoin, you get 266%." The Bitcoin part of their business is not going away, but it's really hard to know within each quarter how big it's going to be and how many transactions they're going to see, how much that's moving around in their platform. Do you have any thoughts, Brian, on how to factor that segment into what to expect for this company going forward? Because it's a growth lever, but knowing what it really can do for the business is tough.

Feroldi: When it comes to Square and Bitcoin, I view it as an asymmetric bet. If they are right about Bitcoin and if they are viewed as early adopters and make it really easy to get into, it can provide this business with some tremendous upside. However, if they're wrong about that and that business goes away or declines significantly, it still doesn't really damage the core thesis for owning this stock. It will hurt, it will sting, this company will probably go down, but the core business is still pretty strong. I like it when management teams make these kinds of small bets that they see success in and then build them out over time. But either way, if you're investing in Square, you are going to have some secondhand Bitcoin exposure.

Lewis: Right. I mean, if you're growing your top line at 44% for two years, you're basically doubling in that period. Even if they wind up with something that is a slight ramp down from that, let's say they wind up with 30% or something like that at some point, this is still a very quickly growing business, especially given how big it currently is, $100 billion.

Feroldi: It really is. Again, given the company's scale that you just mentioned, it's nice to see that they are putting up this kind of growth rate. What kind of growth rates are we going to see next quarter in Q3 and Q4? That's still up in the air to me. Just like we touched on last week, that's where we're going to start to see some really wonky comps for all these companies that COVID has been a tailwind for them. That will be more earnings reports that I'm definitely going to be digging into. But if you just zoomed out and would say what's the overall view of this company, I think there's no doubt you have to say thesis on track.

Lewis: The thesis is on track and I will say, I own it. I just wish I owned more. There have been a lot of times over the last couple of years where if you manage to buy into Square, you're sitting pretty. They're basically like a 3X from where they were in 2019. Depending on when you bought in 2020, you're sitting on some pretty handsome gains as well. It's been a remarkable performer. You go even further back and it's a 10-bagger easily. I think there's still a lot of potential there. You've got to right-size your expectations because they are so big already. But with that growth rate, I think there's still plenty for shareholders to be happy about.

Feroldi: Just as a point of reference, PayPal, which also had a pretty good earnings report earlier this week that we're not going to talk about, that is a $300 billion business. Square at just $100 billion, there's room for growth, I think.

Lewis: Yeah, especially when you contextualize it within the TPV that's happening on the platform. We're in a very similar conversation, I think, with MercadoLibre, the next company we're talking about. It's something where these platforms move so much. It's helpful to contextualize their valuation within that because some of the core financial metrics are helpful, but only so helpful and really grasping how wide their reach is.

Feroldi: Yes, that's right. To get into the headline numbers here, yet again a number that just completely blew me away. MercadoLibre's revenue in the most recent quarter was up 158% to $1.4 billion. Dylan, I've been a shareholder of this company for like 10 years, if you rewind the clock 10 years ago and tell me, "This company is going to grow consistently and then it's going to more than double," I wouldn't have believed you, but that is exactly what has happened. Incredible.

Lewis: Yeah. To provide a quick history lesson on that revenue growth, you go back over their recent quarters, Q1 of 2020, they post 70% year-over-year growth, which, for a business that is deep in the tens of billions in terms of valuation, is pretty strong. I think anyone would be pretty happy with that. 2020 Q2, 123%; 2020 Q3, 148%; 2020 Q4, 149%. We have seen an already very big business find accelerating revenue growth, which is incredible. We're going to talk a little bit about why with some of the different business segments they've got going on, but this is to me just a classic case of optionality. You have a really strong e-commerce platform, a business model that we have seen work in so many places being brought to a place that's in need of it and then on top of that, you start getting into the payment system that they've created, all of the fintech investments they are making. I am so excited about this business. I'm so happy that I own it, Brian.

Feroldi: Yeah. To your point, this company is like the classic example to me of the power of optionality, the power of placing lots of little bets many, many years ago, and if just one or two of them pay off, it can really be huge, and MercadoLibre is definitely there with Mercado Pago, its payment system. In fact, when you look at this company's earnings reports, they tout that first. They're not even like a marketplace company first anymore; they consider themselves to be a fintech company. But those numbers are crazy strong and it's unbelievable that their growth rate has been accelerating. But as you pointed out, Dylan, this is a company that you have to look by beyond the headlines and really focus on the core metrics because this is a company that currency translations always mess with the numbers.

Lewis: Yeah. They do business in over a dozen countries. There are a lot of different currency swings that happened locally within those economies and they are always repatriating things, bringing them back into U.S. dollars and kind of wreaking havoc on the financials. So there are quarters where the business results are really strong, that doesn't necessarily translate to the financial numbers that were [...] in dollars. In this case, we got some really good financial numbers and really happy about that, but clicking into the business metrics themselves, really strong. Core platform, gross merchandise volume was $6.1 billion, up 114% year-over-year. That's definitely a part of the business that's going to be benefiting from the pandemic and from staying at home, and you see that with the items sold increasing, over 200 million during the quarter, up 110% year-over-year. They are bringing more people onto the platform, Brian, we're seeing more users, 62% growth there, over 70 million. There's a lot to love with the core platform. I would say, though, there's probably even more to like with the payments platform.

Feroldi: Yeah, it's almost Square-like numbers almost. I mean, their total payment volume was up 129% in local currencies to $14.7 billion. If you break that apart, remember this is a company that you can use both on the platform as well as off the platform. I love that investment that they're making into using Mercado Pago off the platform. On-platform gross payment volume was $6.2 billion, that was up 119%. Off-platform gross payment volume was $8.5 billion, up 136%. That again shows the power of that decision to decouple it from being forced to use on the platform.

Lewis: Yeah. Brian, I think six years ago, seven years ago, this is an e-commerce thesis. Then maybe three, four years ago, it became e-commerce, but then all of this other stuff that's being rolled into what they offer, Mercado Pago, a lot of that fintech investments that they're making. I think now maybe over the last year or so, the thesis has become a wonderful payment system that has helped a lot of people transact on their platform, but it's basically becoming the go-to digital payment system for the local economies that it serves.

Feroldi: That is a wonderful, wonderful place to be, given the Internet penetration rates, given the digital payment penetration rates in Latin America. Despite how far this company has come, it still has a long way to go before it saturates those markets. One thing that is worth noting about this is they have been investing in themselves aggressively for more than a decade now, especially to build out their fulfillment network. I really like that move because that will give them a competitive advantage more so than almost anything else they can do over the long-term. The real cost of that to me is not only the financials, but it's the gross margin. Gross margin for this company a few years ago was in the high 60%'s, and it has been trailing downwards ever since because obviously a shipping business and an e-commerce platform business just have completely different margin profiles. So I'm OK with that. Its currently gross margin is down to under 50%, that's a worthwhile trade-off because it's making investments in the moat. But that does make it hard to see that gross profit not keeping up with the revenue.

Lewis: Yeah. This is the classic "it's got to be worth it long term." At first, you see the margin dipping, you're like, "Okay, why?" It makes sense. Then you're like, "Okay. Does that make sense long-term for the direction this business is trying to go in?" I think so, but I do think it's worth noting. Another place that this is going to show up for them in their financials is they've drawn down over $1 billion cash over the past year. You look at their balance sheet, they're still quite a strong company. There's still a decent amount of cash sitting around, but they have been putting a lot of money into the platform, into their offerings, and into new product segments, and it makes sense. When you see the growth rates that they have, they are in hypergrowth mode. You want to fuel that as much as you can. But as an investor, you need to realize that's where that money is going, and a big part of whether or not that's good money spent is going to play out over the next couple of years.

Feroldi: I think that will prove to be money that is very well spent, especially when you see companies like Sea Limited that are taking an interest in the Latin American market and are having a lot of success. One thing that could keep MercadoLibre differentiated over the long term is its own logistic network that it can use to ship parcels quickly, and expeditiously, and for free. Those are investments that investors will have to eat today, but I really think over the next five to 10 years, they will pay off for this company.

Lewis: I think so. I think it insulates them from a lot of competitive pressure, too. They are in a spot where they are the first mover in a space and there is undoubtedly going to be more competition. You just mentioned Sea Limited. But if you are able to build out your presence more and more and more, build out your offerings more and more and more, it's only going to be good for you, especially long-term when you're in such a land grab period for the markets they're in.

Feroldi: You got it. One other thing of note in MercadoLibre before I move on is that as you teed up at the top of the show, they have dipped their toes into the Bitcoin. They purchased just about eight million dollars worth of Bitcoin. I think, again, just barely scratching the surface of what they could potentially do. That's a very, very tiny bit for this company with over $1 billion in cash and a market cap that is probably around $80 billion or so. It's not going to be thesis-changing at all, it's more of a footnote. But it could be a sign of more to come.

Lewis: I think so. I like that we talked about MercadoLibre after having talked about Square because we have seen the impact that crypto exposure can have on a business. Looking at MercadoLibre, having just talked about how the local currencies can really wreak havoc on their financials, it's probably even more difficult for the people that are in those countries. If you're operating a fintech platform, a peer-to-peer payments platform, you know that crypto is on people's minds. You know that particularly for people where they're in local economies where their currency might not be as stable, that's probably something that they're starting to look at a little bit more. I think it makes sense that they are starting to think about this as a business. It just plays into where they're trying to go and I think they're probably going to be trying to offer their customers.

Feroldi: Yeah, I love that. I absolutely agree with everything you just said. I think that it would be great if they could build a crypto feature into their Mercado Pago. Again, if you look at Square's results, it's very obvious that there is demand for that, especially when there are big currency swings. I like that they're starting to experiment with that. That could become something substantial for them in the future. But these are the kind of reasons I like companies like MercadoLibre. They're willing to experiment, they're willing to make small bets, and if they have success, they invest more into that over time. That's a proven formula.

Lewis: I would not be surprised to see that amount increase in the coming quarters and years. I think that this is then taking that first dip of their toe in, but there's probably going to be more money to come, especially if it becomes something that lands on their consumer platforms. Brian, I take a step back and I look at these results holistically. Again, these are baffling growth rates for a company of this size. If I weren't already such a big shareholder of MercadoLibre, I would be buying more. Fortunately, unfortunately, it's already my largest holding.

Feroldi: Yeah, mine too. So I don't think I need to rush out and buy anymore either. But it's not my largest holding because I wanted it to be, it wound up as my largest holding because the company performed so well. But this is a company that totally deserves it. But like you, I think there are plenty of reasons to be bullish on MercadoLibre. Even at today's prices, like you, if I didn't own any, especially when you're viewing the results that this company just put out, there are lots of reasons to want to become a shareholder today.

Lewis: Brian, third company we're talking about, another Fool favorite, Etsy, another business that has benefited tremendously from stay-at-home pandemic and the pivot to digital. Let's talk about their results.

Feroldi: Sure. If you just look at the trailing numbers for Etsy, there's nothing to say except wow, they look great. Gross merchandising sales for this company were up 128% to $3.1 billion. Masks were a major product category for this company just over a year ago, and management pointed out that mask sales were just 2.5% of that total. Masks are not the driving factor here, that is everything else that the company sells. Etsy's take rate, which is the amount of transaction volume that they keep for themself as revenue, that bumped up to 60 basis points to 17.5%, that's a very healthy number. You combine those two things together, revenue for this company was up 141% to $551 million. Wall Street was only expecting $530 million. Really great results on the top line.

Lewis: Super strong. I look at the results, like you said, going backwards, they look fantastic. I think there are a lot of core business metrics that looked really, really good with this company too. You think about the way that an e-commerce player operates, you want to see more people coming onto the platform. We highlighted the user numbers that we saw from MercadoLibre, same story here with Etsy. We have new buyer increases of over 100% year-over-year, active buyer increase of 90% year-over-year. This habitable buyers figure, Brian, are you familiar with this at all?

Feroldi: Yeah, habitual buyers is buyers that continue to buy. I think it's once a quarter or more than like four times per year, something along those lines. Those are people that are Etsy loyalists, such as myself, by the way. If every time at Mother's Day, Valentine's Day, wife's birthday, anything like that rolls around, Etsy is the very first place that I go. People that are habitual buyers on Etsy, that was up 206%. Those are exactly the kind of numbers that you want to see if you're investors. More buyers are joining this platform and they are sticking around and spending more. That's great news for the long term.

Lewis: It's great news. It makes growth a lot easier, especially if you can build that habit and that relationship with your users. The story, I think, for Etsy is hard going forward, and it's the curse of a business that's put up some really, really great results and seeing the tide lift the boat pretty tremendously.

Feroldi: Yeah, that is something, if you were paying attention to Etsy stock this week, even though they reported that great revenue result, by the way, the rest of the income statement looks great too. Gross margin was up 1,100 basis points to 74%, net income was up 11 folds to $143 million or $1 per share. Wall Street was only expecting $0.88. But despite posting a huge beat on the topline and the bottomline, this stock fell about 15% in the day following the report. The reason why is 100% blamable on forward guidance. In the second quarter, management is going to be going up against some much tougher comps versus the year-ago period. They are saying that gross merchandising sales are only expected to grow between 5% and 15%. That's for a company that just put up 128% gross merchandise sales volume increased in the most recent quarter. Revenue is going to grow a little bit faster than that, 15% to 25%, and adjusted EBITDA is going to grow even faster at 28% to 35%. However, when you compare going from triple-digit growth to mid-teens or low 20% growth, that's a bitter pill to swallow.

Lewis: It is, and this is exactly what we've been talking about knowing at some point the music was going to stop a little bit for companies that have had so much growth pulled forward. I mean, the growth rates that they were able to put up are nothing short of incredible and the stock followed those growth rates. We're looking at a company that was up, even after the recent dip, 250% from where they started 2020. The market has realized the increased value of this business and the revenues there, we're going to continue to see growth, which is wonderful. But what probably would have taken place over several years is now lumped forward into 2020 and 2021 and those denominators are getting bigger and bigger. It's always going to be tough for business.

Feroldi: We've seen Wall Street bid up so many companies that were benefited from COVID to just extreme heights. That makes sense because the numbers that they were putting out where jaw-dropping, just like Etsy just reported. We've again seen so many of those companies that may be that the COVID may all of a sudden become a tailwind. Their stocks have been smacked around. I mean, look at Zoom, for example. Zoom just reported absolutely phenomenal results with its most recent quarterly report, and yet that stock is down like 50% or 55% from its all-time high. I think you can throw Etsy into that bucket. Wall Street became too excited, bidded up far too high, and now they're on the tail side of that where they're saying this is going to be a tailwind for the company and it's possible now that they're overreacting in the other way. But if you just strip back and look at the core results for this company and their growth in active buyers, their growth in active sellers, the expansion of the take rate, the expansion of gross margin, and this company has been significantly invested in itself, particularly in sales and marketing, I think that COVID will be an enormous boost for this company. No doubt in my mind, this is a much stronger business today than it was a year ago.

Lewis: Yeah. I think there is a helpful lesson here for folks that are maybe newer to high-growth stocks and are getting used to owning them and the reactionary moves to the market when you own a business that has a lot of expectations priced into it. Even after dropping about 30% from highs, we're still talking about a company that's worth $21 billion, Brian, and we just mentioned before, it's I think something like $550 million in revenue and that's for the quarter. But they're an e-commerce player, pretty good margins for an e-commerce player. But at some point, if the growth rate is slow, the multiple is going to contract. It's part of the math that we just have to accept when it comes to valuation. I don't see a lot here though that bust the long term thesis. It's just the market slightly reweighting based on what they need to expect going forward, given the realities of this business.

Feroldi: I think that's exactly right. That's why valuation in the short term is so unpredictable and so hard to realize. Again, if you were just giving someone the headline numbers and you said topline beat, bottomline beat, margins expansion, new sellers up, new buyers up. What do you think the stock price would do? You'd be like, "Must be flying high," not dropping 15%. That's why I never try and guess short term market movements. Stay focused on the business. Etsy's business is getting stronger. I'm personally a shareholder. I have absolutely no plans to sell.

Lewis: Yeah. I think that's right, Brian. For me, in my own personal investing journey, there was a period where I really let valuation get in the way of me buying things. I learned quite a bit from listening to Brian Stoffel, one of our colleagues, who basically says like valuation doesn't really matter that much to me. That's not really how he tends to look at businesses. Overtime, I have been able to see the light. Thankfully, spending so much time in the tech space, I've been able to understand it. Where valuation factors in a little bit more for me is understanding what I own and what is likely to happen with business outcomes and the results that business has put up. Not necessarily that it's going to affect what I do with that company, but that I can expect the red or the green that I'm going to see in my portfolio based on the results that they're putting up.

Feroldi: You have to be willing to endure long periods of seeing your portfolio go down if you're going to invest in high-growth businesses. That is just the name of the game. As we said before, when things are going well, they tend to go really well. Wall Street bids these companies up beyond what they should be. Then when the tide turns, they tend to get hit much harder than the stock market in general. That's just a part of high-growth investing. But if you're willing to look for great businesses, buy great businesses and can hold through those downturns, you should be hugely rewarded in time.

Lewis: I think we should just pull that soundbite. [laughs] That's it. That's what we talk about all the time, and I think it's something you almost want on a post-it note next to your computer monitor just so that you can keep it in mind everyday when you check your portfolio. I wish it was an interstitial pop-up when I checked the Merrill Lynch. Because when you see movements, it can be hard to remind yourself of that. But if you have that in your head, if you have the investing journal to help you out and maintain sanity with a lot of the stuff, it comes a lot easier. To your point, when we started the show, Brian, the Fool community helps a lot, too.

Feroldi: Tremendously. The Fool community has helped me so many times. I mean, I've seen my personal portfolio get smacked around a lot. Every time I flock to Fool Live or the discussion boards and just want to see what other investors are doing, having a good community behind you is worth its weight in gold.

Lewis: Yeah. Brian, I'm happy to count you in my community.

Feroldi: Happy to be there, Dylan.

Lewis: [laughs] Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach and say "Hey," shoot us an email at [email protected] or tweet us @MFIndustryFocus. If you're looking for more stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today and thank you for listening. Until next time, Fool on.