It's been a tough year for e-commerce marketplace Etsy (ETSY 2.86%), but the company is showing signs of its former high-growth-stock life again after its Q3 2022 earnings. Not only did Etsy top guidance during the summer and autumn, but it also provided a solid outlook for the busy end-of-year holiday shopping season. After a mid-teens percentage rally, shares are now down 54% with just two months left to go in 2022.
Zooming out to see the bigger picture, though, Etsy has been a wonderful investment for shareholders over the longer term. With the stock down in the dumps and Etsy indicating higher growth is on the way, is it time to buy?
Few inflation worries here
Etsy's Q3 financials beat management's own expectations. Gross merchandise sold (GMS) was just over $3.0 billion in the third quarter ($2.8 billion to $3.0 billion forecast), and revenue was $594 million (as much as $575 million forecast). As for revenue, which increased nearly 12% year-over-year, Etsy could attribute the gain to an increase in its seller's fee from a 5% of a sale to 6.5% now.
Not all was perfect, though. Red hot inflation has been deeply impacting retailer companies this year as consumers shift their spending habits to compensate for higher basic living expenses. Etsy got hit too. Active sellers fell nearly 1% year-over-year to 7.4 million (which includes music equipment marketplace Reverb, as well as the acquisition of Brazil's Elo7 and fashion marketplace Depop over the summer of 2021). Active buyers fell nearly 2% to 94.1 million from last year.
Nevertheless, for a company that focuses on handmade items that tend to be a bit more pricey than what can be found elsewhere, investors had reason to be pleased. Inflation has certainly throttled Etsy' acquisition of new users, but things could certainly have been worse. After all, with pesky inflation in energy, food, and housing sticking around, it wouldn't have been surprising to see more shoppers pass on boutique custom-made furniture, decor, or clothing. But as it turns out, Etsy has some loyal fans out there.
An admission it overpaid
There was another problem that doesn't come as much surprise: Etsy did realize an impairment charge on its purchase of Elo7 and Depop. Essentially an admission it overpaid for the acquisitions, Etsy wrote off $1 billion in goodwill related to those purchases last year when the stock market was flying high.
Subtracting that non-cash item, though, Etsy did remain profitable in Q3. The company has generated $384 million in free cash flow through the first nine months of 2022, a healthy free cash flow profit margin of 22%.
A strong finish to 2022
For Q4, the management team says it expects GMS to be in a range of $3.6 billion to $4 billion, representing a 5% year-over-year decrease at the high end of guidance. Revenue is expected to be $700 million to $780 million, compared to $717 million last year. Again, it looks like Etsy is getting some help by the increase in seller fees, but the outlook also reflects more services provided to merchants as well.
At the top of the guide, revenue for Q4 would represent 9% growth from last year. Given the current economic mood and the U.S. Federal Reserve aggressively hiking interest rates (which is lowering the value of international revenue), Etsy's outlook could have been far worse. Plus, though it is investing in rolling out new services and trying to grow its presence in India, Etsy expects to remain a positive cash-generating business to close out 2022.
Etsy now has negative earnings per share over the last 12-month reported period, thanks to that goodwill impairment charge. But on a free cash flow basis, shares trade for about 18 times trailing 12-month free cash flow to enterprise value (market cap, plus debt and minus cash on the balance sheet). If you believe this growth story is merely taking a breather as the economy works through a spate of record inflation, shares of this e-commerce marketplace are starting to look cheap.
