Etsy (ETSY 0.49%) reported second-quarter earnings on July 27 that revealed solid, top-line growth. The e-commerce marketplace has been grappling with headwinds from the economic reopening as consumers have more options for spending their money.
Despite those challenges, Etsy managed to retain many of the customers it gained during the earlier stages of the pandemic when brick-and-mortar shopping was discouraged. As a result, Etsy's stock has rallied higher since the second-quarter financial results were released.
So investors may be asking if it's too late to buy Etsy stock. Let's look at Q2 and Etsy's valuation more closely to decide.
Etsy's fundamental prospects are improving
Gross merchandise sales (GMS), which measures the total value of items sold on Etsy's marketplace, decreased by 0.4% year over year in its second quarter, which ended on June 30. Notably, Etsy does not own the inventory sold on its platform. It merely brings together buyers and sellers and takes a percentage of each transaction. For that reason, GMS is a critical metric for Etsy.
Still, the decrease is not as bad as it might appear. Etsy thrived in the earlier stages of the pandemic when folks were more hesitant to leave their homes. It's understandable there would be some pullback in GMS as economic reopening gained momentum.
ETSY Revenue (Quarterly) data by YCharts
Despite the decrease in GMS, Etsy's overall revenue rose by 10.6% in Q2 versus the year-ago period. That can partly be explained by Etsy's "take rate" -- the portion it takes on sales. Etsy increased its take rate to 19.3% in Q2 2022, which is 190 basis points higher than the 17.4% take rate in Q2 2021. That means Etsy was taking a higher percentage of sales than at any time in the previous five quarters. As you might imagine, sellers are not too happy about this increase because that money comes from their revenue.
That said, Etsy's active sellers have increased by 41.5% to 7.4 million in Q2 from 5.2 million in the prior-year period. So despite the higher fees, it does not appear that sellers left the platform. That could mean that they find Etsy's value outweighs its costs. One feature that sellers certainly appreciate is the 94 million active buyers on Etsy as of June 30, which was up by 3 million year over year.
Overall, amid the headwinds of the economic reopening, Etsy made solid progress in structurally improving the business with more sellers and buyers, as well as a higher transaction take rate.
Etsy's stock is still inexpensive after the rise
ETSY Price to Free Cash Flow data by YCharts
Etsy's stock is still historically inexpensive, measured by its price-to-earnings ratio of 35 and its free cash flow multiple of 29. The stock's valuation surged in 2020 as it benefited from lockdowns. However, it has gotten considerably cheaper since then. Meanwhile, the platform has added millions of buyers and sellers and implemented fee increases without losing either.
In other words, it's certainly not too late to buy Etsy's stock.
