Is Etsy Stock In Serious Trouble?

Etsy (ETSY 0.34%) stock's boom-bust of 2020 and 2021 is long gone, but the stock still asks shareholders for patience. Thanks to more sluggish financial performance to kick off 2023, Etsy has given back most of the positive momentum it built in the second half of 2022, and is down over 20% so far this year. This e-commerce marketplace must not have gotten the memo that a new "bull market" has begun.  

Is Etsy in trouble? And if not, what will it take for the company to return to sustained long-term growth? 

Etsy's era of sluggishness continues

After years of double-digit percentage growth for e-commerce, the industry has matured. Blame the pandemic for accelerating this maturation, sure. Lockdowns likely pulled forward years of expansion. For over a year now, consumers have been rebalancing their mix of online purchases with more store visits. 

The end result for Etsy is another year of sluggishness. But it isn't just the absence of e-commerce industry hypergrowth that's the problem. Much has also been said about inflation, and how that has put a damper on consumer spending -- especially for the typically higher-priced handmade crafts featured on Etsy's marketplace. Q1 2023 gross merchandise sold (GMS) fell slightly year-over-year and could swoon again in Q2. Etsy fee hikes again drove revenue growth to sellers implemented last summer. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization), Etsy's preferred profit metric, did increase, although the EBITDA profit margin contracted slightly from the previous year.

Data source: Etsy. Adjusted EBITDA outlook is based on Etsy's guidance for profit margins of ~26%.

As for that seller fee increase implemented last year, the upshot here is that Etsy reported the first year-over-year increase in active sellers on its platform for the first time since 2021. With 89.9 million merchants, at least plenty of small businesses and craftspeople still find value in the Etsy marketplace.

Don't blame the economy

Etsy CEO Josh Silverman and the top team have justified the Etsy fee increase by saying it will go toward strengthening the power of the shopping experience. Indeed, this is probably the key problem that needs to be solved right now. According to Etsy's research, U.S. shopper awareness of the Etsy brand is high (who hasn't heard of Etsy at this point?). But actual purchasing, even in Etsy's top categories, remains low. Etsy says its brand association with consumers in top merchandise items was just 11% in personal gifts, and 3% each in home & living and style.

Suffice it to say that's no good for Etsy shareholders, and especially not for the millions of sellers using the site. 

Improving the ability to search for items on the Etsy app and site are top priorities (work in AI to improve product suggestions is key). Marketing the Etsy brand, as well as upping the game in order shipping options, are also important initiatives that can turn things around for the company.

Given the ongoing outlook for sluggish marketplace growth at best, and falling EBITDA profit margins as Etsy invests to improve its technical capabilities, shareholders will need more patience. 

I'm not complaining, nor am I going to sell my stake in Etsy. But realistic expectations need to be set. This company's days of hypergrowth are over, and they aren't likely coming back. Time will tell how well current efforts will work to rekindle growth. In the meantime, Etsy stock currently trades for just under 20 times trailing 12-month free cash flow -- about as cheap as the valuation has ever been.

So Etsy doesn't seem to be in serious trouble, just a period of strategic adjustment. I rank this stock a hold for investors that already have a position. I'm content with the stake I already have in Etsy right now.