Etsy (ETSY -0.30%) thrived at the pandemic's onset as millions of people flocked to the platform to buy custom-made masks. The article of clothing was mandated by governments worldwide for folks who wanted to leave their homes and enter public spaces. That tailwind is retreating as most governments have eliminated the requirement.
That can explain, in part, why Etsy's stock is down considerably off its highs. Still, the e-commerce company has at least one green flag to counter the red flag of economic reopening.
Green flag: millions of new active customers
Of course, it's not surprising that Etsy would benefit from the pandemic's onset. The e-commerce retailer offered consumers a safe way to shop when local, non-essential, brick-and-mortar retail stores were forced to shut their doors temporarily. Impressively, Etsy has retained and even expanded on the millions of new customers it added during the surge. In its most recent quarter, which ended on March 31, Etsy boasted 95.1 million active buyers. That was an increase of nearly five million from the 90.6 million active buyers it claimed at the same time in the prior year.
Similarly, Etsy increased active sellers to 7.6 million in the quarter ended in March, up from 4.7 million in the year before. Note that Etsy does not own the inventory sold on its platform. Instead, it connects buyers and sellers and takes a percentage of each transaction. In that regard, buyer and seller totals are crucial for its ability to generate revenue.
ETSY Revenue (Annual) data by YCharts.
It has done exceptionally well as sales have grown from $75 million in 2012 to $2.3 billion in 2021. For that reason, the millions of new active buyers and sellers are a green flag for Etsy, to be sure.
Red flag: economic reopening
That said, billions of people have been vaccinated against COVID-19, which has given governments the confidence to remove most business restrictions. With economies reopening, people have more options for spending their money.
That's becoming a headwind for Etsy. In its quarter that ended in March, Etsy's gross merchandise sales, which measures the value of transactions on its platform, increased by just 3.5%. To put that figure into context, gross merchandise sales surged by 132% in the same quarter in the prior year.
ETSY Revenue (Quarterly YoY Growth) data by YCharts. YOY = year over year.
That figure is crucial because it is the sum from which Etsy takes a percentage as revenue. It should not be surprising then that revenue also increased by a meager 5.2% in the quarter ended in March. Again, much slower than the previous year and its longer-run average. In addition to consumers having more options with their money, they have less money to spend. Last year, several forms of fiscal stimulus were distributed in Etsy's primary U.S. market, including boosted unemployment benefits, stimulus checks, and child tax credits.
Understandably, growth would slow for Etsy following the surge from the pandemic, when millions of customers came to the site seeking custom-made masks. The red flag is the uncertainty of not knowing how far growth will slow. The red flag has taken center stage lately, and Etsy's stock is down 70% off its highs. But investors need not panic and sell the stock now as most of the bad news is arguably priced into the stock.
