Etsy (ETSY +1.92%) shares plunged on Thursday following the release of its second-quarter numbers and third-quarter outlook. While Q2's top and bottom lines both came in better than analysts expected, guidance for the quarter currently underway was light. CEO Joshua Silverman also acknowledged that inflation is still forcing people to make "tough choices" with their spending, further discouraging shareholders.
Except, what if Etsy stock's steep sell-off was less about the company's plausible future and more about the broad market's current bearish conditions?
That may well be the case, making this dip a prime buying opportunity.
For most investors, the glass was already half empty
During the second quarter, Etsy turned nearly $629 million of revenue into a per-share profit of $0.45. The top line was up 7.5% year over year, and while the bottom line declined from the year-ago comparison of $0.51, both figures beat analysts' estimates for earnings of $0.42 per share on sales of $618.6 million.
The trouble sprouted from the nature of those sales. Marketplace revenue -- Etsy's cut of merchandise sales -- didn't grow as briskly as services revenue did. Service revenue is the additional money sellers pay Etsy for more features and additional help promoting their goods.
NYSE: ETSY
Key Data Points
Fanning the bearish flames was the company's guidance for the third quarter now underway. It's calling for a top line of between $610 million and $645 million. Consensus estimates of $632.4 million are at the upper end of that range. And as was noted, Silverman didn't exactly articulate optimism during the Q2 earnings call.
What if, however, Etsy stock was going to be upended no matter what Silverman said, and no matter what the company's Q3 revenue guidance looked like?
Don't dismiss the possibility. The market's been on the defensive for over a week now, reversing a 20% rally since the beginning of the year. Most investors may have been unconsciously ready to take at least some of their unrealized profits off the table. Surprisingly healthy GDP growth in Q2 that could lead to yet another interest rate hike, a downgrade of the U.S. government's debt, and rising loan defaults and delinquencies are just some of the reasons investors have been given to sell some of their holdings here and walk away.
Plenty of corporations themselves have helped paint a concerning bigger picture too. Microsoft issued revenue guidance for the current quarter that was less than analysts were anticipating. Levi Strauss lowered its previously announced full-year earnings guidance as well. Ditto for Legget & Platt, Generac, Planet Fitness, JetBlue, and several other consumer-facing names.
Given this backdrop, it was easy for investors to jump to a pessimistic conclusion regarding Etsy's near-term prospects -- the environment feels bearish. That doesn't mean Etsy isn't actually doing well, though, and certainly doesn't mean it's not poised to continue growing.
The rest of the Etsy story
If you don't think Q3 sales guidance of between $610 million and $645 million is solid, think about this: Etsy only reported a little less than $595 million of revenue in Q3 2022.
Meanwhile, EBITDA margin rates are improving too. The company believes its adjusted EBITDA will land between 27% and 28% of revenue in the current quarter. That's up from the second quarter's 26.4%, despite a still somewhat anemic consumer market. The company's website also continues to grow its active buyer and seller counts.
Analysts aren't expecting the company's long-term sales and profit progress to actually slow down anytime soon, either. Although this year's bottom line won't get the company back to its peak profit reached in 2021, it puts Etsy back on track to do so after last year's big accounting charges linked to the ill-fated acquisitions of Depop and Elo7. Meanwhile, revenue growth itself is still going strong and will likely accelerate beyond 2025 when the economic dust likely settles, and the new and improved Etsy starts to cruise.
Data source: StockAnalysis.com.
There's no reason to doubt such growth is in store since Etsy is bolstering its sales platform at a key time for the handicraft industry. Celebrities like John Legend and Martha Stewart, for instance, are now featured promoters for the website, and some sellers are getting their due payments much faster than they have in the past. The company's also hosting regular training events to help sellers become more successful.
Moreover, all this is happening at a time when the handmade crafts market is just reaching its full stride. Market research outfit IMARC Group expects the worldwide handicraft market to grow by more than 9% per year through 2028, led by the U.S., where Etsy does more than half of its business.
Don't let the market's noise play games with your mind
Of course, none of this helped Etsy shares sidestep a sizable sell-off following the release of last quarter's earnings. Why not? Largely because most investors were already rattled by the time Etsy got a chance to share its Q2 results and its Q3 guidance. Anything but estimate-trouncing results and guidance was apt to be met with the same sort of post-earnings selling that's become the norm in just the past few days. Perception is powerful, even if it can be misleading.
It's not necessarily a bad thing, though. These knee-jerk sell-offs are buying opportunities for stocks that received more punishment than they deserve. Your job as an investor is seeing through such noise and making smart decisions based on the bigger picture.
If you're doing that with Etsy right now, you should be seeing a brighter future than almost everyone else is seeing here.
