Etsy (ETSY 0.49%) hit a speed bump in its latest reporting period.
For its 2022 fourth quarter, reported on Feb. 22, the e-commerce company saw revenue rise 13% year over year to $807 million and beat analysts' estimates by $55.1 million. However, its net income fell 32% to $109.5 million, or $0.77 per share, and missed analysts' estimates by three cents.
For the full year, Etsy's revenue rose 10% to $2.57 billion, decelerating from its 35% growth in 2021, and it posted a net loss of $694 million -- compared to a net profit of $494 million a year ago. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) stayed nearly flat at $717 million.
The recent slowdown wasn't surprising, since most e-commerce companies faced tough year-over-year comparisons in a post-pandemic market. But could Etsy's stock bounce back this year after declining 17% over the past 12 months?
Image source: Getty Images.
What happened to Etsy over the past year?
Etsy's number of active sellers declined 1% year over year to 7.47 million in Q4 as its number of active buyers fell 1% to 95.1 million. As a result, its total gross merchandise sales (GMS), or the value of all goods sold across its platform, declined 4% to $4.03 billion. All three of those core growth metrics decelerated over the past five quarters.
|
Metric |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Active sellers growth (YOY) |
72% |
63% |
42% |
(1%) |
(1%) |
|
Active buyers growth (YOY) |
18% |
5% |
4% |
(2%) |
(1%) |
|
GMS growth (YOY) |
17% |
3% |
0% |
(3%) |
(4%) |
Data source: Etsy. YOY = Year-over-year.
Etsy's growth decelerated as the lockdowns ended, its sales of handmade masks dried up, and it lapped its acquisitions of the U.K.-based fashion resale marketplace Depop and the Brazilian artisan marketplace Elo7 in 2021. The effect of inflation on consumer spending exacerbated that slowdown. In the first quarter of 2023, it expects its GMS to decline another 5% to 11% year over year as its revenue rises 4% to 10%.
Even though Etsy's GMS is declining, it's still growing its revenue by hiking its merchant fees, driving more orders through its own payments platform, and selling promoted listings through Etsy Ads. Those efforts boosted its take rate, or the percentage of each sale it retains as revenue, by 290 basis points year over year to 20% in Q4. Its outlook for Q1 2023 implies its take rate will continue to rise even as it struggles to gain new sellers and buyers.
But as Etsy delicately executes that balancing act, its margins are still being squeezed by its integration of Depop, Elo7, and Reverb (the musical instruments marketplace it acquired in 2019) -- which all operate at lower margins than its namesake marketplace. As a result, Etsy's adjusted EBITDA margin fell from 31% in 2021 to 28% in 2022. It expects its adjusted EBITDA margin to come in at 26% to 27% in Q1 2023, compared to 27.5% in the prior-year quarter.
What will happen to Etsy this year?
Etsy didn't provide any precise guidance for the rest of the year. During the Q4 conference call, CFO Rachel Glaser said that in a "stable macro environment, the math would suggest a return to GMS growth rates in the teens in the second half of this year" but that the "data and information we are seeing so far in 2023 related to consumer spending shifts and pressure from the macro environment makes us very cautious."
That caution indicates that analysts' expectations for 8% revenue growth and 7% adjusted EBITDA growth this year could still be too optimistic. And based on those estimates, Etsy's stock still isn't a screaming bargain at six times this year's sales and 21 times its adjusted EBITDA.
Amazon, which is growing at a similar rate and competes against Etsy with its Handmade marketplace, trades at just two times this year's sales and 11 times its adjusted EBITDA. MercadoLibre, the Latin American e-commerce leader which is growing much faster than either company, trades at four times this year's sales and 32 times its adjusted EBITDA.
Therefore, I believe Etsy's sluggish sales growth, shrinking margins, and elevated valuations will prevent it from outperforming the market this year. It could continue to expand as people shun Amazon and other mass retailers to buy more customized and handmade products, but it won't gain much momentum until its GMS growth accelerates again.
