Etsy (ETSY 1.56%) is down almost 60% from its 52-week high and is set to report earnings after the closing bell on Thursday, Feb. 24. Here are the metrics you'll want to watch to see whether the stock has any hope to regain its losses.
What happened
Fewer people are buying and selling on Etsy's marketplace. New buyers on Etsy have decreased for three consecutive quarters, from 12.8 million in Q4 2020 to 7.0 million in Q3 2021. Furthermore, the company has reported a slight decline in its active buyers and repeat buyers over the past two quarters -- a cumulative 0.3% and 0.8%, respectively. And its habitual buyers, which the company defines as buyers with six or more purchase days and $200 or more in spending in the trailing 12 months, increased only 1.2% during the same time period.
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Additionally, Etsy relies on its sellers and their unique product offerings to differentiate itself from its competitors. And those sellers just declined for the first time in Etsy's history -- from 5.23 million in Q2 2021 to 5.20 million in Q3 2021.
One reason for the stagnant growth in buyers and sellers could be the customer experience on Etsy's website -- the company has noted that app users actually engage more with listings by favoriting more products and viewing more items than web users. Even on Etsy's most recent earnings, CEO Joshua Silverman called out how the Etsy App offers "a more dynamic and rich experience" that's not possible in mobile web. But mobile web is still the largest platform by visits for Etsy, so the experience may be turning off some buyers and sellers.
What could turn things around
Despite a deceleration of buyers and sellers on Etsy, there are areas for optimism. For buyers, the company recently rolled out a delivery transparency feature that shows the expected delivery date for a product, which sets clearer expectations when an item will arrive. This feature has also prompted sellers to ship on time, cutting late shipments in half over the past nine months, according to management. Additionally, Etsy has been focusing on transitioning web buyers to its Etsy App, where it can use the data it gathers when users sign up to offer them custom listings, spurring those users to use the app -- and buy through it -- more often.
For the seller side, Etsy has implemented a "Star Seller" program, which rewards and incentivizes sellers with a special shop badge, which leads to higher buyer confidence, according to management. As a result, star sellers have a 25% higher repeat purchase rate than non-star sellers. Also, shops with $10,000 USD or more total sales automatically become eligible for Etsy's advertisements on sites other than its own. That broadens sellers' audience without increasing their financial risk, since sellers only pay Etsy an "advertising fee" if a given ad leads to a sale.
Moreover, in the past year, Etsy has acquired Elo7, a Brazilian online marketplace, and Depop, a secondhand shopping platform. Both acquisitions follow Etsy's business model of peer-to-peer two-sided marketplaces that don't require capital for shipping and warehouse storage, like its competitors Amazon and Walmart do. But perhaps more importantly, Etsy's acquisitions allow the company to capitalize on market trends.
First, with Elo7, Etsy expects Latin America's e-commerce market to grow 20% annually over the next four years, and the acquisition gives the company an additional 1.9 million active buyers and 56,000 active sellers in Brazil alone. Secondly, with Depop, Etsy believes that the secondhand retail market will grow 11x faster than the broader retail clothing sector by 2025 to $77 billion in sales annually. That tracks with Depop's gross merchandise sales of $650 million and revenue of $70 million in 2020; each increased 100% year over year.
What's next
Etsy's fourth quarter is historically its best-performing quarter of the year -- the company has guided for $3.9 billion to $4.1 billion in GMS and $660 million to $690 million in revenue, which would represent a year-over-year increase of about 11% and 9%, respectively.
When Etsy reports its earnings on Thursday, see whether it's able to match or beat its GMS and revenue guidance, show growth in its active sellers and buyers, and display optimism with its new subsidiaries. If the company delivers good news in those areas, then perhaps the e-commerce company shouldn't have been discounted after all.
