Did Investors Understand Etsy's Numbers?

In this podcast, Motley Fool analyst Dylan Lewis and Motley Fool senior analyst Tim Beyers discuss:

• Etsy's short-term and long-term story.
• The growth levers for Etsy.
• The trends driving Nvidia and the hype baked into its rally.
• One shiny, distraction for investors watching the chipmaker.

Plus, Maya Lau, host of the podcast Other People's Pockets, joins Sierra Baldwin from The Motley Fool's Connectors team to discuss her new show and what she's learned from having conversations about salary, economic class, and careers.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 23, 2023.

Dylan Lewis: AI means big business for Nvidia and Etsy sellers keep selling. Motley Fool Money, starts now.

Dylan Lewis: I'm Dylan Lewis sitting in for Chris Hill and I'm joined by half man, half caffeine, Tim Beyers. Tim, how is it going?

Tim Beyers: That is factually correct, Dylan, and  I'm thankful that you got that out of the way.

Dylan Lewis: I'm always thinking about the guest trying to get us right into it. Excited that you're caffeinated; I am too. Earning season keeps rolling. We have a lot to dig into. We have some names that are very familiar to Fools. I'd say we're going to be talking about Etsy a little bit one of the best-performing stocks of the past decade and a company in my portfolio. I'm going to make you wait for the best-performing stock in the last decade or one of the best performing stocks in the last decade and first turn the focus over to myself, Tim, and then what I own. Etsy, is a company that I own and one that I think a lot of Fools own, and a company that has been going through a bit of an interesting period over the last couple of years.

Tim Beyers: I think that's a kind and thoughtful way to think about it. If you read the Etsy earnings release, Dylan, what you will see is the earnings equivalent of a Jedi mind trick. These aren't the last three years you're looking for. You should go back to 2019. There's a lot of mention of three-year comparables in the press release. For example, they will say consolidated gross merchandise sales of 4 billion that was down 4 percent year-over-year, and down 0.7 percent on a currency-neutral basis, but it was up over 145 percent on a three-year basis.

I think what's interesting about this, Dylan, and why we should pay attention to it is Etsy is trying to establish that they have returned to normal, that 2019 was normal, and now, 2023 is normal. The way you should be thinking about Etsy's business is take 2019, slap some growth on it, and now, think about that level as where Etsy should be. Your question as an investor should be, "Is that fair?" If it is, then what is normal Etsy look like? Because otherwise, and I know we can get into more numbers. I'll pause there, Dylan, but some of the other numbers are not that great.

Dylan Lewis: Yeah, I think one of the interesting things with this quarter is the company posted just over 800 million in revenue. It came in ahead of estimates. We saw a little bit of disappointment on the earnings per share number, but if you get beyond the estimates and you look at some of those year-over-year numbers. We're talking about a company that grew the top line at 12 percent year-over-year. Really, you mentioned before that gross merchandise sales was down year-over-year. That increase that we're seeing in revenue is more attributable to things like their fees and what they're doing on the advertising side, not so much the activity that's happening on their platform.

Tim Beyers: Right. They've gotten a lot of blowback for those fees. They had an increase earlier in 2022 and there were some sellers which they've done many, many times before, where they said, "That's it. We're taking a break for certain period of time." I think this latest boycott was on the order of a week to protest the fee increase. To be fair, Etsy's take rate in terms of what it takes from sellers across all of those merchandise sales to feed its own coffers is not enormous, but they do keep raising it, which makes it harder as an Etsy seller. When the take rate goes up, it does make it harder as an Etsy seller to earn profit on your sales. So I can understand why they are pushing back on this.

But it does say something to me that both on a quarter-over-quarter basis and on a year-over-year basis, those gross merchandise sales were down 4 percent year-over-year in the quarter, 1.3 percent down for the full year. There's a lot of business being done on it, $13.3 billion in 2022 versus 13.5 billion in 2021. What is the healthy Etsy thesis look like? If you go back to 2019 and you look at where this business is going today, theoretically, Dylan, this is going to have to shift some more of that Etsy revenue is going to have to come from gross merchandise sales. So in terms of guidance, that's what we should be looking for and yet, according to these numbers so far, we're not really seeing that.

Dylan Lewis: Yeah. You mentioned the seller perspective there where, I think, the take rates about 20 percent, that was up, I think, 300 basis points year-over-year. There's a natural limit on how much sellers will expect. As a shareholder of the company I don't want to see that being the only thing that's really driving growth for them either, because it's a lever, but it's a lever that really has a natural limit.

Tim Beyers: Right, the kind of things that you don't want to see. Again, if we're going to buy this thesis of Etsy, as 2019 was normal, 2023 will be more normal. Things that we don't want to see are like active sellers being down just under 1 percent year-over-year in both the quarter and for the year, but that's what happened. The active buyer base down 1.3 percent for the quarter and down 1.3 percent also for the year. Really, those aren't great numbers. So what I want to hear from Etsy, and to be fair, I haven't gone through the call to really understand this, but let me tell you what I'm looking for in 2023, I'm looking for how management is pulling levers to get more sellers onto the platform and more buyers onto the platform, because this sustainable Etsy is one that is a much bigger marketplace. If you're expecting as an investor, Dylan, for this company to compound, you want the marketplace to be much bigger, more buyers and more sellers, more than anything else. That's probably going to drive growth here, and right now, those trends are in reverse.

Dylan Lewis: One of the things I wanted to ask you about, Tim, was, I want to give the company some grace, because we did see, basically, a 3x in their top line over the course of three years, which is incredible and that's a big transformation. The story of, "Look at us on a three year comp," is one that Etsy is trying to convince the market of, but they're not the only company that I think is trying to make that comparison. I think a lot of growth companies are trying to tell that story right now. When do you say, "This is something I'm willing to lend this company," and when do you say, "You know what, I'm going to stick to the year-over-year comps and hold them accountable to what we've been seeing and maybe would judge a company on more traditionally."?

Tim Beyers: I think that's a really good question. I think I give them more grace when the valuation gets better and gets cheaper, the stock is down slightly today, not by that much. It's about 1.5 percent the last time I looked, Dylan. But overall, the free cash flow for this business in the last fiscal year was, according to my calculations, about $415 million, so that puts the present value, the free cash flow yield for this company at about 2.4 percent, which is pretty good, but it's also not amazing. It certainly doesn't make Etsy look cheap to me. When do I give them more grace? I'm probably a holder here, to be honest with you, like if I held shares, I would be holding and waiting for more management guidance on how they make that marketplace bigger. When I'm willing to pay more of a premium is when I see those key performance indicators, really starting to grow, and grow consistently, grow on a trend line.

When gross merchandise sales is starting to move up into the right, and even more importantly, when active sellers and active buyers, like here would be a really interesting indicator, Dylan. That would be a strong signal to me where if the valuation hadn't changed too much, but these indicators were pointing directionally correct, where I'd be very interested in a buyer. When I see growth in active buyers and active sellers outpace growth in gross merchandise sales. If those two things are growing faster than gross merchandise sales, that tells me there's a leading indicator happening here. The marketplace is growing bigger and the pie is probably going to start accelerating in growth, like, "Okay, I'm interested." If the valuation hasn't run away from it at that point, I'm starting to rub my hands and get interested.

Dylan Lewis: Tim, as a shareholder, I would love to see it. Let's hope it happens. I'm right there with you. Another company that has gone through a bit of a transformational couple of years is Nvidia. It's been an incredible performer. It is a company that a lot of Fools own and follow. It has basically pick a tech trend and it has ridden that trend over the last couple of years. The company is up 10 percent today after posting a top and bottom-line, beat this quarter, revenue came in at 6 billion for the fiscal fourth quarter and EPS at 88 cents, both edging out estimates. We also saw what looked like a pretty strong forecast from the company as well. Tim, what jumps out to you looking at the report from Nvidia?

Tim Beyers: Well, it's interesting. I mean, this looks like one where maybe two things are at play. One might be that we had expected a lot less from Nvidia than we should have. But the other, and this is the thing that scares me a little bit. This is another company that I like, that I have been on the recommending end of in multiple services. I do like the company a lot. I don't think the valuation is all that cheap, Dylan. So I wonder how much of this is, "Oh, boy, Nvidia is going to be supplying. AI as a service to a bunch of cloud companies. Lookout, this thing's going to the moon." I wonder how much of that is tied into some of the share price today, because the numbers, let's be honest, were not amazing.

Let's hit a couple of things here. Just about of the market platforms, is what Nvidia calls them. There are six of them, four of them were down and down significantly in the fourth quarter. Honestly, year-over-year, Gaming was down 46 percent, Professional Visualization down 65 percent, OEM and other down 56 percent. Sorry, there are five, not six. So three of the five down, automotive was up 135 percent, and then the biggest one, data center was up 11 percent. The numbers are not amazing. Here's the thing that's happening, Nvidia is in a transition. In this last quarter, in the fourth quarter, Nvidia basically generated more than twice the revenue in data center than it did in gaming, which is a real switch.

From years ago, gaming was the business and data center was this minority potion. Now, Nvidia chips, particularly those graphics processor units, you can think of those as like the V12 engines of semiconductor. Large chipsets for large-scale processing, those things are just massive. They do a lot of parallel processing. They're very useful in data centers and that's becoming quite apparent. But the transition, Dylan, is going to be, when does the gaming sector, which to your point, when the gaming sector was gangbusters, guess what was happening? There were lots of people who are doing Bitcoin mining, buying external GPUs, putting them into systems and saying, "Go get me some Bitcoin because I want to be rich."

Dylan Lewis: It was the gold rush, Tim.

Tim Beyers: It was the gold rush. That sector has been subject to that over and over and over again, and now, it's on the downswing. I think part of the hope is like the rush to AI will be like, "Oh, OK. There's going to be a lot of buying of those external GPU cards and here we go, that gaming sector is going to recover." It's far too early to say that, but this business is healthy, it's just in transition.

Dylan Lewis: You anticipated a question that I was going to get to and I think I might just ask it anyway because I think our listeners are probably looking for a specific take on this, Tim. Every headline that I saw related in Nvidia's earnings name-checked AI.

Tim Beyers: I know.

Dylan Lewis: It seems like you mentioned the crypto boom before and the way that's affected this company. How do you think about the business versus these trends and tailwinds that seem to just pick it up every couple of years, because name something that's been big in tech? Nvidia has been at the intersection of it the last couple of years.

Tim Beyers: It's true. Dylan, I'll just be honest with you here. I hate this and I'm just going to give a hat tip to our coworker, Seth Jason on this, who is much smarter about AI than I am, because he runs our AI service. He's made the point that there has been functional AI around for a really long time. It's just not the generative AI which is ChatGPT. It's been more machine learning. That is highly useful and under the hood and you don't really see it, and that's the good part about it.

I hate seeing in the Nvidia call so many mentions of AI, because that means that there's probably some hype baked into this rally right now that it's not going to be backed up by numbers. Probably, not for a while. Yeah, you're right. I mean, they're getting some tailwind here. I'm going to go ahead and say some of that tailwind is undeserved. Having said that, that doesn't mean that Nvidia is a bad business, it just means that don't get distracted by the shiny thing. Focus on the fact that Nvidia is a wonderful supplier of chips to data centers around the world, and that business is not going away. You don't need to have AI workloads everywhere for Nvidia to sell a boatload of chips into the data center segment. Just please be careful. This is not a screaming AI play, that's just nonsense.

Dylan Lewis: That's a sober and I think really great. Look at that, Tim. I think it's a reminder. It's so easy for us to get carried away when we see a company has exposure to something that is blowing up. Just looking at comments that management has made, Nvidia's CEO was talking about OpenAI and ChatGPT and said that this is the iPhone moment for AI because it is something finally that consumers can wrap their heads around. As investors, we got to take that step back sometimes.

Tim Beyers: You know what? That comment from Jensen Huang. You can look at that comment two ways. You could say, "Wow, it's an iPhone moment, holy moly. That's amazing," and expect that things are going to go to the moon tomorrow or you could look at the actual history of the iPhone. How long did it take for the iPhone to become really the App Store? To become the central piece of the mobile ecosystem that it is today. It took many years. Let's just remember here, for context, the original iPhone, I kid you not, in order to do mapping in the original iPhone, Dylan, I don't know if you remember this, they didn't have a GPS. Do you remember what they were using to render maps in the original iPhone?

Dylan Lewis: I don't. I didn't have an iPhone until the iPhone 3.

Tim Beyers: Okay.

Dylan Lewis: So I was behind the curve on that one.

Tim Beyers: It was WiFi hotspots.  That's what it was. There was no GPS chip in the original iPhone. There was a lot of incremental innovation that had to happen before the iPhone really became the iPhone. If you take Jensen Huang at his word, which you can, that's perfectly fine, just take it in the historical context and say, "I get it. All right. Let's remember the ChatGPT is a toddler and does things badly and we'll get better."

Dylan Lewis: Listeners, remember, we are in the Wi-Fi hot-spot era of artificial intelligence. There's a long ways to go. Tim, thank you so much for the reminder and thank you for joining me.

Tim Beyers: Thanks, Dylan.

Dylan Lewis: How much money do you make? What class are you in? Do those questions make you a little uncomfortable? Maya Lau is a former investigative reporter for the Los Angeles Times and the host of a new podcast, Other People's Pockets, a show about other people's money. Sierra Baldwin caught up with Lau, discussed her new show and the obstacles to talking about money.

Sierra Baldwin: Before we dive into your show and talk about other people's money, I actually wanted to flip the script a little bit, and ask you, what is your relationship with money?

Maya Lau: My relationship with money is complicated and has changed a lot over time. I was a newspaper reporter for many years and an investigative reporter. I started to get really frustrated about money in terms of my income. Obviously, most people know newspaper reporters don't get paid that much. I always do that going in and I was fine with that. But over time, as I had a kid and started to get a little bit older, not that I am super old, I'm 37, but I started to want the things that people want, like owning a house one day and having more stability.

I started to get really frustrated and I found myself in my personal life just asking a lot of questions about money and wondering things about my friends who had maybe purchased homes or were doing things I wanted to do. I started to get really curious and want to just ask people directly like, "How much do you make or how did you make that work? How did you make this purchase?" I think my relationship has changed over time. I mean, I definitely would call myself, somewhat of a, do gooder or think I want to make a positive impact on the world definitely out of college, wanted to work for non-profits, or definitely was not after money. I think that now I'm OK with saying that I want to make a decent amount of money. I don't want to become a billionaire, but I would be fine with making several hundred thousand dollars a year. [laughs] That to me, as of a few years ago, would feel weird to say. Yeah, it's definitely changed and I think I've become a bit more open about my desires.

Sierra Baldwin: That seems to be a big theme of your show. When you're talking to people is really learning what makes them tick and what motivates them when it comes to money and making money and choosing their career pathway. You actually talk to a nuclear physicist who got his PhD, but then could barely get by and ended up pivoting a bit and choosing a career path that provides a little bit more of a lucrative and secure future for his family. Can you talk a little bit about your conversation with him and some of the takeaways that you had?

Maya Lau: Yeah. I talked to Dr. Liam Dodd, who was a nuclear physicist. He worked at some of the world's most prestigious institutions in that line of work. But even so was not paid very much and was literally homeless, was couch surfing, was eating cheese sandwiches and barely able to feed himself. He ended up making a transition into a much more traditional career in used auto sales actually, but still working with data and he's still a scientist, but that was an interesting interview because it really highlighted the fact that your dream job or your passion can be a trap. Physics is his passion.

It's like loving art to hammer music, I mean, it really is the language he wants to live and breathe all the time, but most of the people that can be true physicists their whole lives, like he found that they had family money or there were some other reason why they were able to get by, or they got a super hard to get professorship or something like that. I think that it just illustrated, I've found in my own life that this thing that you might think of as your dream job, sometimes it can be a trap because when you're in that dream job, you don't feel empowered to speak up about pay, about getting paid more. You feel lucky to even be able to have your dream job.

You tell yourself that other people would die for your job and so aren't you lucky? I think that realizing that for some people, there might be an afterward to that, there might be something that comes after that that you never would expect. Sometimes leaving your dream job can be really freeing because it's something you never would expect to do and surprising yourself is really important. That physicist I talked to, I think he's really happy now. He's really stable and he has better quality of life.

Sierra Baldwin: I think that is a dilemma that we all face is whether we should chase our passion or if it has lower income potential or chase the money. Is there anyone that you've spoken to for the first season of the show or who's coming up, who is following a passion, maybe it has a lower-income potential and they've acknowledged that, but they're comfortable with it? If so, what did you learn from them?

Maya Lau: Well, I talked to a chef who has one of the best restaurants in the world. It's considered "fine-dining", although he does not like that term because it connotes white tableclothes and which is very much not his restaurant, but he's absolutely following his passion. This is a joy for him even though it is so much work and he doesn't make that much money off of it. He's fine with it though. One of the interesting things about this show is that I'm interested in this idea of jobs that seem really prestigious and are really prestigious yet don't generate that much money and I think that being a chef can be one of them.

He's super celebrated, but the amount of money he makes on the restaurant, in total makes between 100,000-200,000 Australian dollars a year. Most of it is actually from his paid ad promos on Instagram, not from the restaurant. Yeah, I think that there are a lot of people I've spoken to, you're never going to break them away from it and they really are OK with making what they make. For him, the question of what is enough is absolutely about his family and his mental health and getting to do what he loves. He doesn't feel like he's lacking in any way.

Sierra Baldwin: You also talked to a television writer, an astrologers, I think, and an influencer, journalist, young entrepreneur, would you say that there's something that they all have in common when it comes to attitudes toward money?

Maya Lau: I think that most people have shared that money is uncomfortable for them to talk about. On the show, I asked people directly, "How much money do you make, what's your net worth?" Things like that, the questions that we all wonder, but few of us feel really OK directly asking people, and most of them have some shame or just have some discomfort around money. Sometimes can't even articulate why, like why does this feel so weird to talk about? It's like talking about sex or something like, I've never talked about this on a podcast before when we talked through, like why do you think it's uncomfortable? I think a lot of it comes from childhood. How money was talked about in your family. There's a recurring idea of if you don't have a lot of money or you don't have what you think is enough money that you feel shame because society tells you that it's a personal failure. It's a character flaw. You should have figured it out. You were too stupid to not figure it out when really none of that is true. That is something that keeps coming around again and again.

Sierra Baldwin: You mentioned that asking people about what socioeconomic class they think they're in, you mentioned that that was one of the tough questions or ones that had a little bit of a harder time responding to. Why do you think that is?

Maya Lau: I wouldn't say it's with all guests, I mean most guess actually do answer that freely. We actually did an episode, that will come out, that is taking a step back after we've done some episodes and talking with an expert on class issues and money issues, and chewing on, not naming names, but these themes came up, like, "What is that about?" I asked her that, and she said that, often when people have changed classes, either they've gone up or down. There's a real identity shift. It's very hard for people to accept or it's just odd.

Even if you come from a working class background when you're a child and now, you're say upper middle-class, some people just have a hard time. It's they don't want to betray their working class routes. They feel like they're working class. Those are there people, those are their values. Saying that they're upper middle-class makes them feel like an ass or something, stuff like that. Then sometimes I guess tied to their profession or just not wanting the wider world to think of them a certain way. I'm not sure, but it is a really puzzling, but interesting thing. That's exactly why I love to have these conversations because it's like, "Why is that?"

Dylan Lewis: As always, people on the program may own stocks discussed on the show and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. We'll see you tomorrow.