As they start to lap the initial effects of the pandemic last spring, many smaller e-commerce stocks have been getting beaten up. 2020 was a banner year for digital businesses, and year-ago comparable financial figures have been tough, leading to a "slowdown" for many digital commerce companies' growth rates.
But that doesn't mean these companies should be relegated to "pandemic stock" status and forgotten going forward. While they may not be growing at the torrid pace they were before, they're still growing at double-digit percentages and compounding their long-term expansion track records.
1. Etsy: Building on momentum to become a "house of brands"
Etsy reported 23% year-over-year growth in revenue in Q2 2021 to $529 million, quite the slowdown from the triple-digit percentage pace the company was still notching just a quarter ago (though Etsy was still lapping pre-pandemic figures in Q1 before the massive surge in online spending). However, better illustrating Etsy's incredible momentum and compound growth, Q2 revenue was 192% higher than the same period in 2019.
Etsy is a highly profitable online marketplace these days. It generated a free cash flow of $261 million during the first half of this year, good for a free cash flow profit margin of 24%. The company is using its strength to double down on the unique and handmade items segment of the e-commerce industry. A couple of years ago, it acquired online music equipment selling platform Reverb to great success and is now going to try and duplicate the strategy with the purchase of Elo7 (the "Etsy of Brazil") and Depop (a luxury goods reseller popular with 20-somethings in the U.S., U.K., and Australia).
Given Etsy's strong position in its e-commerce niche and enduring growth (Q3 outlook is calling for about 13.5% year-over-year revenue growth, another slowdown that factors in the lapping of the online buying boom last summer), I like its move to build on its momentum in fashion and other vintage items. Elo7 and Depop will open the door to new customer acquisition opportunities, and the two companies are worthy uses of some of the nearly $2.6 billion in cash and investments the company had on its balance sheet at the end of June.
Etsy's stock price is still more than 20% below the all-time highs reached early in 2021, and currently trades for 40 times trailing 12-month free cash flow. Given the massive opportunity it just created for itself with the purchase of Elo7 and Depop, this looks like a great long-term value right now.
2. Pinterest: Don't worry about a decline in users
A loss of users is bad news for an internet-based business model, and that's just what Pinterest reported in Q2. U.S. monthly average users (MAUs) fell 5% year over year to 91 million, although the global total rose 9% year over year to 454 million from an increase in international MAUs. Worse still, Pinterest said MAUs in the U.S. had fallen 9% in the month of July, leading to a global MAU slowdown to just up 5% year over year.
As a result of these dismal-looking figures, the stock price cratered after the last earnings update, and it is sporting a year-to-date return of negative 14% as of this writing. But I say it's a great buying opportunity.
There are a few reasons why. For one thing, management believes most of the MAU declines are due to the loss of less engaged and less profitable desktop computer users. Highly coveted mobile users -- which skew to younger demographics that spend tons of time on their mobile devices -- actually increased in the U.S. during Q2 and grew 20% year over year internationally.
Second, Pinterest's usefulness as a shopping tool is also on the rise. Merchant catalog uploads grew 50% from Q1 2021 to Q2 alone, benefiting from the company's integration with e-commerce software giant Shopify. As a result of this extra monetization of its user base, average revenue per user (ARPU) surged 89% year over year, including a 163% rise in international ARPU. And at just $0.36 of ARPU outside of the U.S., this metric is barely getting rolling for Pinterest.
Pinterest's revenue also exploded 125% higher year over year in Q2 to $613 million, and the outlook calls for a low-40% increase in Q3. The stock trades for 96 times trailing 12-month free cash flow, but that's a long-term bargain considering how fast this company's bottom line is rising right now.
3. Wix: Delta variant uncertainty takes an unfair bite out of Wix
Share prices of Wix took a dramatic turn for the worse after the company released its Q2 update. The stock fell more than 30% from its late-July levels and is now down 28% so far in 2021. All of this is in spite of the company reporting a 34% year-over-year increase in revenue to $316 million, $2 million more than the guidance it provided just a few months ago.
What gives? Wix is blaming the delta variant of COVID-19 that is now spreading around the world. The uncertainty this has created for the global economy led management to downgrade its full-year 2021 forecast, reducing its revenue outlook by as much as $25 million to a range of $1.26 billion to $1.27 billion. Full-year free cash flow was also reduced down to a range of $35 million to $40 million (previously $62 million to $72 million) reflecting ongoing investments to promote long-term growth.
However, the renewed worry over the pandemic is creating a buying opportunity for this growth stock. Wix is a leader in no-code web development and is rolling out loads of new features to its platform. The latest, Branded App By Wix, allows users to easily create their own mobile-native applications. Given how incredibly important it is to engage with consumers via mobile devices these days, this is a huge feature drop for Wix. The strength of its offerings underscores why it's outgrowing even its small peers. Squarespace, for example, grew its Q2 revenue just 31% year over year to $196 million.
Wix trades for 113 times trailing 12-month free cash flow after Q2, a metric that could get worse through the second half of this year as the company spends heavily to foster its full long-term potential. But even factoring in the temporary reduction in profitability, this is as cheap as Wix stock has been this year, and the prospects for this leading web creation software firm are better than ever. I plan to buy more shares this month.