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Etsy's Pandemic Boost Is Over -- But Here's Why I'm Not Worried

By Neil Patel – Aug 8, 2021 at 12:08PM

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Dig beneath the headline numbers, and you'll see a business that's still humming along nicely.

After riding the pandemic-fueled e-commerce boom over the past year and a half, Etsy's (ETSY -1.60%) eye-popping growth seems to be coming to an end. The online marketplace for niche and handmade goods reported second-quarter financial results last week that beat Wall Street estimates on the top and bottom lines, but it appears investors were disappointed with third-quarter guidance.

However, the company's long-term outlook remains intact. A deeper look at the business will help alleviate any investor concerns in this growth stock.

Smiling person seated in a living room, opening a delivered package.

Image source: Getty Images.

Solid second-quarter numbers

In the three-month period that ended June 30, Etsy generated revenue of $529 million, up 23.4% from the year-ago period. This is a significant slowdown from the gains registered in the previous four quarters, which all experienced top-line growth greater than 125%. Active sellers (up 66.7%) and active buyers (up 50.1%) still increased at an impressive rate.

But shareholders were discouraged by management's third-quarter revenue guidance of $500 million to $525 million, which fell below the consensus estimate of $527.5 million. The stock dropped as much as 13% on the news.

But there is something investors should be very happy about. If we exclude face-mask sales from this quarter and the prior-year quarter, gross merchandise sales (GMS) rose 31%, compared to 13.1% overall. This provides a cleaner comparison, as the pandemic provided a temporary boost for this specific category of merchandise.

Additionally, the numbers show how versatile and adaptable Etsy's marketplace is. On the earnings call, CEO Josh Silverman highlighted weddings as a powerful shopping category today. "We're also seeing building momentum in some categories like back-to-school," he added.

Etsy's 5.2 million active sellers have shown flexibility by offering whatever is in demand at any particular time. And this is a major reason the stock has been a massive winner, up 12-fold over the past five years.

The most important customer

Etsy's most valuable customer is what it calls the habitual buyer -- someone who, during the trailing-12-month period, shops on the platform at least six times and spends at least $200. This group grew 115% year over year during the second quarter, faster than any other buyer segment.

The importance of these 7.9 million habitual buyers can't be understated. These are people who clearly love and appreciate what Etsy has to offer, and they require much less marketing effort on the part of the company.

Because Etsy is a marketplace connecting buyers and sellers, it benefits from a powerful competitive advantage stemming from network effects. In other words, as more people use Etsy, the platform becomes more appealing overall. This makes it extremely difficult for any other company to challenge Etsy's position.

And based on GMS growth per active buyer of 22% in the most recent quarter, engagement has never been higher. This is a very positive sign for Etsy as it demonstrates the company's moat is getting wider.

Still a large untapped opportunity

Etsy's recently completed acquisitions of Depop, a global fashion-resale marketplace, and Elo7, a Brazilian e-commerce site for handmade goods, expand the company's penetration in an already huge $1.7 trillion total addressable market.

Apparel is the single largest e-commerce shopping category, and it is projected to reach $543 billion by 2025, supporting the purchase of Depop. And Brazil is the largest e-commerce market in Latin America, supporting Etsy's foray into that region.

In the earnings release, Silverman said, "In addition to driving growth in our core Etsy.com marketplace, we are now focusing on integrating these exciting businesses into our 'House of Brands.'" It's certainly an exciting time for the company.

Expecting Etsy to continue its monster growth in a more normalizing business environment is unrealistic. It's best to look at the company with a long-term time horizon, focusing on the big-picture trends. Those are still clearly looking good, which is why I'll continue holding onto my shares.

Neil Patel owns shares of Etsy. The Motley Fool owns shares of and recommends Etsy. The Motley Fool has a disclosure policy.

Stocks Mentioned

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ETSY
$135.01 (-1.60%) $-2.20

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