Since hitting an all-time high of $296.91 last November, Etsy (ETSY 0.34%) shares have come crashing down 67%. The online marketplace for unique and handcrafted goods is experiencing a major slowdown following the boost it received during the depths of the pandemic throughout 2020 and early 2021.
But investors shouldn't write off the stock just yet. I believe there are three essential data points that shareholders need to pay attention to when Etsy reports its first-quarter 2022 financial results on May 4. They should help to better explain just how well (or poorly) the business is doing.
1. Growth in users
The first metric to watch is Etsy's user growth, which includes both active buyers and active sellers. Obviously, a marketplace's success depends heavily on its ability to attract more users to the platform, and Etsy is no different.
In the last reported period (fourth quarter of 2021), Etsy increased its active buyers 17.6% year over year to 96.3 million at year-end. At the same time, active sellers rose 72.3% to 7.5 million. When everyone was stuck at home trying to avoid the coronavirus for most of 2020, it was extremely easy for Etsy to bring on more users because shoppers had limited options to spend their money. But now, as economies reopen, it'll be important for Etsy to keep adding buyers and sellers.
Long-term trends, including consumers' heightened interest in supporting small businesses, as well as the popularity of entrepreneurial pursuits and side hustles, provide a clear boost for Etsy to keep growing over time. And there's no reason to believe that these tailwinds will abate anytime soon. Even with the recent hike of its seller fees -- from 5% to 6.5% on April 11 -- Etsy still remains the top marketplace for special goods.
2. GMS per active buyer
It's not enough to simply add more users. Etsy needs active buyers to actually transact on the platform. That's why gross merchandise sales (GMS) per buyer is incredibly important as a way to measure engagement. In the 2021 fourth quarter, GMS per active buyer over the trailing 12-month period jumped 16% year over year to $136. Because Etsy sells a broad array of merchandise, ranging from categories like home furnishings and jewelry to clothing and beauty products, shoppers should have no issue finding just what they're seeking.
Image source: Getty Images.
The pandemic resulted in a surge of mask sales on Etsy's website. But because this was a temporary boost, looking ahead, the business will have to resume its reliance on non-mask revenue. For the first quarter of 2022, management is forecasting GMS of $3.2 billion to $3.4 billion, which implies 5% growth at the midpoint over the prior-year period.
Etsy's brand recognition continues to rise over time. Therefore, it's not difficult to believe the company could keep stealing business from other retailers, particularly when it comes to special occasions like holidays and birthdays.
3. Take rate
Finally, Etsy's ability to monetize the activity on its marketplace matters tremendously. The take rate, or the amount of revenue divided by GMS, was 18% in 2021 just for the Etsy marketplace. The company's subsidiaries, including Reverb, Depop, and Elo7, carry lower take rates, which dragged down the overall company's take rate to 17.1% last year. Still, this has trended higher over time, clearly a positive sign for shareholders.
The decision to introduce a higher seller fee should raise Etsy's take rate going forward. And this is beneficial because it not only can result in more sales and net income, but it will increase the lifetime value of Etsy's user base.
With more of the population getting vaccinated and consumers shifting their spending from products toward experiences, the tailwind that benefited Etsy since the spring of 2020 is slowly starting to fade. But if the business can continue growing its user base, increase spending per active buyer, and maintain a healthy take rate, then I think it's doing just fine.
