Etsy's (ETSY -2.17%) stock closed at an all-time high of $296.91 last November. The e-commece company initially dazzled investors with its robust growth throughout the pandemic. But over the past 12 months, its stock plummeted back to about $120 per share as investors fretted over its slowing growth and shrinking margins in a post-pandemic world.
Does that pullback represent a good buying opportunity for patient investors? Let's review the reasons for Etsy's near-term slowdown, its main tailwinds and headwinds, and its valuations to decide.
Image source: Getty Images.
How rough was Etsy's post-pandemic slowdown?
Etsy's growth in active sellers, buyers, and gross merchandise sales (GMS) all accelerated in 2020 as the pandemic drove more merchants to sell their products online and more consumers to make digital purchases. Etsy also benefited from higher sales of handmade masks throughout the crisis.
Etsy's growth was further amplified by its acquisition of the musical instruments marketplace Reverb in 2019, which made it a top shopping destination for musicians during the pandemic. But as the following table illustrates, Etsy started to lose its momentum in 2021 after it lapped the pandemic (even though it acquired the U.K.-based fashion resale marketplace Depop and the Brazilian artisan marketplace Elo7 that year) -- and its slowdown intensified this year.
|
Metric |
2020 |
2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
|---|---|---|---|---|---|
|
Active Sellers Growth (YOY) |
62% |
72% |
63% |
42% |
(1%) |
|
Active Buyers Growth (YOY) |
77% |
18% |
5% |
4% |
(2%) |
|
GMS Growth (YOY) |
107% |
31% |
3% |
0% |
(3%) |
|
Revenue Growth (YOY) |
111% |
35% |
5% |
11% |
12% |
Data source: Etsy. YOY = Year over year.
But a few green shoots are appearing. Etsy's number of active sellers and buyers declined year over year in the third quarter, but its number of active buyers actually increased sequentially. Its take rate, or the percentage of each sale it retains as revenue, rose 230 basis points year over year and 50 basis points sequentially to 19.8%. Etsy grew its take rate by raising its merchant fees, driving more sales through its own payments platform, and expanding its Etsy Ads service for promoted listings. Those improvements enabled it to generate positive revenue growth even as its GMS growth stalled out.
But for the fourth quarter, Etsy expects its GMS to slip 5%-14% year over year and for its revenue to come in between a 2% decline and 9% growth. During the conference call, CFO Rachel Glaser said while Etsy had experienced a "stabilization" in its GMS growth over the past five months, it was still factoring in a "weak holiday period" into the low end of its fourth-quarter outlook. Analysts expect Etsy's revenue to rise 8% to $2.51 billion this year and to grow 9% to $2.75 billion in 2023.
Can Etsy also stabilize its bottom-line growth?
Etsy's top-line growth might be stabilizing, but its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin still declined 300 basis points year over year to 28% in the first nine months of 2022. It blamed that contraction on its rising headcount, its investments in its newer businesses (like Reverb, Depop, and Elo7), and higher cloud computing costs. It expects its adjusted EBITDA margin to slip to 27% in the fourth quarter of 2022.
Analysts expect Etsy's adjusted EBITDA to dip 3% to $692 million this year, but to grow 9% to $755 million in 2023 as it laps that higher spending. Those estimates imply its adjusted EBITDA margin will remain at 28% in both 2022 and 2023.
Is Etsy's stock too cheap to ignore?
Etsy's focus on handmade products enabled it to carve out a defensible niche against Amazon (AMZN -1.64%) and other e-commerce giants. It should also remain a popular haven for artisans who don't want to join Amazon's similar Handmade marketplace, which charges higher seller fees than Etsy and is integrated into its crowded third-party marketplace.
Etsy's stock trades at 6 times next year's sales and 21 times its adjusted EBITDA. By comparison, Amazon -- which faces similar headwinds in the e-commerce market -- trades at 1.6 times next year's sales and 11 times its adjusted EBITDA.
Therefore, Etsy's stock isn't a screaming bargain yet. Investors are still paying a premium for its dominance of the niche market for handmade products, but its near-term growth rates arguably don't justify that valuation. I believe Etsy will continue to grow over the long term, but I think its stock could drop even further before it's considered a contrarian buy.
