Etsy's (ETSY -0.22%) stock has shed nearly two-thirds of its value since hitting its all-time high last November. Investors fretted over the e-commerce company's slowing growth in a post-lockdown market, and it was tossed aside as inflation, rising interest rates, and other macroeconomic headwinds sparked a rotation away from higher-growth tech stocks.
But did investors toss out the baby with the bathwater? Let's take a fresh look at the bear and bull cases for Etsy to see if its stock is worth buying again.
Image source: Getty Images.
Why do the bears dislike Etsy?
The bears will point out that Etsy's year-over-year growth in active buyers, gross merchandise sales (GMS), and revenues have all decelerated significantly over the past year as it lapped the pandemic's initial impact.
|
Year-Over-Year Growth |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Active sellers |
61.7% |
67.1% |
66.7% |
102.7% |
72.3% |
|
Active buyers |
76.7% |
88.9% |
50.1% |
37.8% |
17.6% |
|
GMS |
117.7% |
132.3% |
13.1% |
17.9% |
16.5% |
|
Revenue |
128.7% |
141.5% |
23.4% |
17.9% |
16.2% |
Data source: Etsy.
Etsy expects that slowdown to continue with just 3%-7% year-over-year revenue growth (and 3%-10% GMS growth) in the first quarter. That broadly missed analysts' expectations for 14% revenue growth. The company attributed that slowdown to tough comparisons against the tailwinds generated by the pandemic-induced lockdowns, stimulus checks, and mask sales a year ago.
Analysts now expect Etsy's revenue to rise just 19% to $2.76 billion in 2022, compared to its 35% growth in 2021 and 111% growth in 2020.
As Etsy's top line growth cools off, its margins are contracting. From 2020 to 2021, its gross margin dropped 120 basis points to 71.9% as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin fell 100 basis points to 30.8%. It expects its adjusted EBITDA margin to decline to about 26% in the first quarter of 2022.
Etsy attributes that ongoing pressure to its integration of the musical instruments marketplace Reverb, which it acquired in 2019; the UK-based fashion resale marketplace Depop, which it took over in 2021; and the Brazilian artisan marketplace Elo7, which it also bought last year. All three of these new marketplaces operate at much lower margins than Etsy's main platform, and only Reverb is profitable on an EBITDA basis.
These purchases also suggest that Etsy might be running out of room to grow organically. It's also ramping up its investments in its Xwalk search engine and new video features. As a result, analysts expect its earnings to stay nearly flat in 2022.
Simply put, the bears will argue that Etsy's slowing growth and rising costs make it an unappealing investment in this tough market for growth stocks.
Why do the bulls still believe in Etsy?
The bulls still love Etsy because it's carved out a defensible niche in the crowded e-commerce market. Amazon challenged Etsy in the artisan space by launching its Handmade marketplace back in late 2015 but failed to dent Etsy's growth over the past six years:
Data source: YCharts.
Between the end of 2015 and 2021, Etsy's number of active sellers rose from 1.56 million to 7.52 million as its number of active buyers jumped from 24.05 million to 96.34 million. Past performance doesn't ever guarantee future gains, but Etsy clearly continues to grow in Amazon's shadow as the leading alternative marketplace for handmade and customized products.
Etsy's engagement rates are also improving. Forty-nine percent of its active buyers made two or more purchases in 2021, compared to 48% in 2020 and 41% in 2019. On a trailing-12-month basis, its GMS per active buyer also hit a record high of $136 in the fourth quarter of 2021.
The company has also been upgrading its search engine and algorithms to display more relevant results, and its overseas business continues to grow at a faster clip than its domestic business. In short, Etsy merely faces some temporary post-lockdown headwinds instead of any existential threats.
After Etsy's year-over-year comparisons normalize, analysts expect the company's revenue and earnings to rise 20% and 30%, respectively, in 2023. We should take those estimates with a grain of salt, but they indicate its stock isn't expensive at 26 times forward earnings and less than five times this-year's sales.
I'm still bullish on Etsy
Etsy faces some near-term challenges, but I think its future looks bright. Its post-pandemic slowdown isn't surprising, and its growth rates should stabilize over the next few years as it continues to gain more shoppers.
Etsy's stock overheated during the feverish rally in growth stocks last year. However, I think its downside potential is now limited at these levels, and patient investors who can tune out the market noise will be rewarded.
