The rough year for Etsy (ETSY 0.34%) shareholders didn't improve after the tech company's latest earnings update. The stock price for this marketplace platform focused on handmade or vintage items and craft supplies declined in the wake of that early August report and is now down over 30% so far in 2023.
To be sure, there were some disappointing metrics in Etsy's announcement, including weaker spending patterns and a drop in sales volumes overall. But the business also made significant strides toward a growth rebound that might power strong returns for investors from here.
Let's take a closer look at two big green flags in Etsy's Q2 report that investors might be missing.
1. Etsy's volume growth is back
One of the biggest knocks against the stock was the fact that Etsy lost customers in 2022. After big gains in the previous two years, last year was more about consolidating those gains than adding to them, management said, ahead of an expected rebound starting this year.
The trends seem to back up that prediction. Etsy returned to modest customer growth in early 2023 as gains were 1% year over year compared to a 1% drop in 2022. Customer acquisitions accelerated in Q2, improving to a 3% year-over-year increase. Etsy now counts a record 91 million active buyers on its platform.
Success here is critical for several reasons, including the impact it has on seller activity. Etsy posted a 12% year-over-year boost in merchants in Q2. Higher fee income from these users resulted in 8% higher revenue even though sales volumes were flat.
Management said that the growth figure was positive for the last two quarters of the month, too, signaling better news ahead in Q3. "We are pleased to see [volume] growth continue into the beginning of the third quarter," CEO Josh Silverman said in a press release.
2. Etsy has plenty of cash
It's true that profitability metrics remained under pressure due to the weak selling environment. Etsy's gross profit margin declined and net profit margin fell to 10% of sales from 13% of sales a year ago.
Yet the business is still in a strong financial position. It remains profitable, with net income over the last half-year landing at $137 million. It's a similarly positive picture for operating cash flow, which improved to $191 million from $185 million last quarter. Etsy ended the period with $1.6 billion of cash on its books compared to $2.3 billion of long-term debt.
ETSY Cash from Operations (TTM) data by YCharts
These green flags might not be enough to make Etsy stock a buy for most investors. Sure, it is faring better in areas like merchant income and buyer growth than rivals like eBay. The stock is still priced at nearly double eBay's valuation, however.
Etsy's successes in keeping its platform an attractive place for both buyers and sellers, along with its financial strength, suggest that the company's best growth days aren't behind it. But investors might want to watch the stock for now until they see signs of sustainably positive sales volumes, along with rising profit margin. Given the trends through the first half of 2023, this good news could show up over the next few quarters.
