Etsy (NASDAQ:ETSY) made a name for itself during the pandemic, as its sellers became a key supplier of face masks and other consumer necessities. This adaptability showcased the value in its marketplace for handcrafted goods, and more broadly, demonstrated Etsy's ability to execute alongside much larger players in the e-commerce industry. As a result, shareholders have seen a windfall since the beginning of 2020 -- the stock price has surged 385%.

However, Etsy's growth has decelerated this year, due primarily to tough year-over-year comparisons. Will that trend continue? In this Backstage Pass video, which aired on Oct. 1, Motley Fool contributors Jon Quast and Jason Hall discuss the numbers investors need to know when Etsy reports third-quarter earnings on Oct. 27.

Jon Quast: Yeah, Etsy. This is a online marketplace for mostly handcrafted goods, personalized things, and they are expected to report third quarter earnings in early November. There's not an official date here with this one yet, but let's look at what happened last quarter.

Etsy had given guidance in three main areas. One, gross merchandise sales. This is the amount of money being spent on their platform. I think it's the easiest way to say that, not necessarily their revenue because they are not selling their stuff, they're selling other people's stuff, or allowing other people to sell their stuff on their platform. Revenue in gross merchandise sales are different. They gave revenue guidance, and they gave adjusted EBITDA guidance. This is your adjusted earnings before you factor out a bunch of different things.

They had given second quarter guidance, and everything that they accomplished in the second quarter was all within that guidance. And to boot, it was at the high end of that guidance. So, of course, the stock fell. Why is the stock falling? Because the growth rate is slowing down for Etsy compared to what they did in the previous year.

In 2020, business was actually really good for Etsy during the pandemic, surprisingly. Why? Because people were buying face masks. As we started, many of us wearing a face masks for the very first time in our lives, people said, "Hey if I'm going to wear this a lot, I want one that is actually represents me, my personality, my interest, what I care about." So people were buying face masks on Etsy.

Going into this new quarter here, let's bring it up, they are giving the same guidance. They're giving gross merchandise guidance, again, of $2.9 billion to $3 billion in the coming quarter; that would be up 12.5% year-over-year at the midpoint of that guidance. However, keep in mind that this includes two recent acquisitions. They bought a company called Depop, which is a online fashion company. They also bought a company called Elo7, which is basically Etsy of Brazil.

Organic growth from this company is actually pretty slow forecast in this coming quarter. Revenue, expecting $513 million at the midpoint. That would be 13.5% year-over-year growth and adjusted EBITDA margin of around 25%. That's about the same as what they did in quarter two.

What I am watching, gross merchandise sales. Again, not a whole lot of organic growth factored into the guidance. However, let's keep in mind that the number one seller on Etsy last year was indeed the face-mask, and that is not selling anymore. Still, without that number one seller, they are still maintaining a very similar gross merchandise sales. It means that people are on the platform buying other things, and that's actually pretty encouraging when you stop and think about it. It depends on how you want to interpret this, but I want to see continued growth.

Jason Hall: I think growth is very positive thing. I think you're 100% right.

Jon Quast: Yeah. You want to see that continued growth in gross merchandise sales for all their brands. But the two that I think are most important are active buyers and active sellers. Why is this important? Because it fuels the growth of the business. If you can attract buyers to the platform, that will attract sellers. If you can attract sellers to the platform, that will attract more buyers, assuming that the sellers are putting out more and more differentiated merchandise. In the last quarter, there was actually a slight dip. First quarter to second quarter, there was a slight dip in active buyers. They are at 90.5 million right now. That was down just ever so slightly.

Active sellers, however, was at 5.2 million, up half a million quarter-over-quarter. I want to see continued growth in the seller side of the business. People going onto Etsy's portfolio of brands to sell their wares. If they are bringing more and more differentiated products to that platform, I really think it's going to be a long-term growth driver for the buyers for Etsy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.