Shareholders of Etsy (ETSY 2.47%), the e-commerce marketplace for craft and vintage goods, are having to play a painful waiting game. The company was booming during 2020 and 2021, and management made some missteps it has been unwinding (it overpaid for marketplaces Depop and Elo7, the latter of which it just sold for a loss). In the interim, growth has sputtered.
Investors can take solace in the fact that it's not just Etsy feeling the pinch of tightening consumer spend. Retailers around the U.S. have slowed, some of them even reporting shrinking sales (looking at you, Target (TGT +2.43%)). However, Etsy stock looks cheap by some metrics -- but is this just a value trap?
NYSE: ETSY
Key Data Points
Etsy gets punished...again
Not two months after I ranked Etsy stock as a hold headed into second-quarter 2023 earnings, the market decided it was time to punish Etsy again. Shares are back down to the multiyear lows last seen during summer 2022, when the bear market was in full swing. This certainly smells like a value trap -- a company whose valuation looks cheap, but whose stock keeps falling in price anyway.
The reason? More muted performance in Q2 2023 in gross merchandise sold (GMS), the total value of items sold on the company's marketplace. At $3.01 billion, GMS was down less than 1% from the same period the year prior, but it has largely stagnated after falling off the $4.2 billion peak in fourth-quarter 2021 (when stuck-at-home online spending reached its climax).
Revenue did manage to increase 7.5% year over year to $629 million, but much of that was due to the fee increase assessed to sellers last summer. Services (including ads) are still a small chunk of the Etsy pie at less than 30% of total revenue, but they did notch a very healthy 21% growth rate.
The biggest issue, though, was of course guidance. Third-quarter (ending in September) GMS is expected to be in the range of $2.95 billion to $3.1 billion, basically flat compared to $3 billion in Q3 2022. And revenue is expected to be in the range of $610 million to $645 million, at the midpoint of the guide, up about 6% from the $594 million performance last year.
Value, or value trap?
Long story short, Etsy doesn't look like much of a growth company anymore, and it's becoming hard to contend that days of sustained double-digit-percentage expansion are going to return. Nevertheless, CEO Josh Silverman, whom I'm still a fan of, explained it like this on the earnings call:
Economic cycles are just that, cyclical. The Etsy brand stands for something different in a sea of sameness, and I believe we've proven our resiliency. I'm confident that we're well set up for future growth as we continue to move through this cycle.
Later in the call, Silverman added that new features to combat slowing consumer spending -- especially in premium-priced items, like what Etsy tends to feature -- are forthcoming. One of them is a simple function that displays deals on items that potential buyers have shown interest in.
The one metric I might point out that shows off Etsy's perennial popularity (and possible signs of things getting back on track) is the number of buyers and sellers. Again, after peaking in late 2021 (96.3 million buyers and 7.5 million sellers), active buyers and sellers have been stagnant at best. However, in Q2 2023, new records were set or are close to being set. Etsy reported 96.3 million buyers again, a 2.5% increase from 2022, and 8.3 million sellers.
The number of sellers is promising, not just because it jumped over 12% from the year prior, but because Etsy is apparently continuing to prove the merits of its marketplace to merchants and craftspeople despite stiff competition from the likes of Amazon (AMZN 3.89%), Shopify (SHOP 3.10%), and others.
One more reason I'm definitely not parting ways with my Etsy position is that profit margins might begin to rise again. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin, Etsy's measure of its operational health, is expected to jump back to a range of 27% to 28%, compared to 26.5% in the first half of 2023. Etsy has been using its profits to repurchase plenty of stock in a return of excess cash to shareholders.
Etsy now trades for just 15 times trailing-12-month free cash flow, and less than 12 times Wall Street analysts' expectations for free cash flow in 2024. Growth is certainly sluggish right now, but there aren't any signs that the company is going to begin contracting, either. As long as that stays true, I don't think this is a value trap, simply a company transitioning from high-growth mode to value-stock mode.
