Online marketplace Etsy (ETSY +0.56%) and social media company Pinterest (PINS 1.30%) both have a lot to celebrate, but investors cannot overlook macroeconomic challenges and shifts in consumer discretionary habits.
Both Etsy and Pinterest offer potential to investors, but based on their latest quarterly reports, the competitive landscapes in their industries, and their valuations, I believe one is clearly a better long-term buy.
The case for Etsy
Etsy operates an online marketplace that specializes in unusual and handmade goods. It also owns music equipment reseller Reverb and online fashion platform Depop.
Operating a successful online marketplace can be a challenge due to the double-edged nature of the business. Such marketplaces need to build a meaningful base of sellers while consistently attracting buyers. As more sellers come to the platform, theoretically, they bring a more diverse range of products for consumers to choose from. This will (hopefully) cause consumers to keep coming back to the site and making purchases over time. And more buyers, will attract more sellers.
NYSE: ETSY
Key Data Points
Some useful metrics to assess if an e-commerce site's business model is working are gross merchandise sales (the dollar value of items sold), take rate (the cut taken from sellers), and buyer trends. In the second quarter, Etsy's gross merchandise sales (GMS) were effectively flat year over year at $3 billion. Both during the second quarter and for 2023's first half, Etsy's take rate of roughly 21% was 2 percentage points higher than in the prior-year periods. This is important to note because despite the flat GMS, the company managed to increase its take rate, which is a valuable indicator of revenue trends.
Etsy ended Q2 with a record 90.6 million active buyers while the number of what it calls "habitual buyers" was flat at 7 million. Habitual buyers -- who have six or more purchase days and over $200 in spend in the trailing 12 months -- account for over 40% of GMS, so the lack of growth in that demographic may at first appear concerning. But investors need to remember that some of what Etsy is seeing is a settling of buying trends fueled by the early days of the pandemic. The company noted in its 2022 report that the number of habitual buyers had increased 194% since the end of 2019.
Image source: Getty Images.
The case for Pinterest
Pinterest operates an image-sharing platform that aims to inspire creativity by helping its users discover new products and services aligned with their interests.
In Q2, for the second consecutive quarter, Pinterest grew its revenues and active users across all geographic regions. The company cited a double-digit percentage growth in the number of users in the highly coveted Gen Z demographic as a primary driver of deepening engagement on the platform. But unlike Etsy, Pinterest is not yet net income positive on a GAAP basis.
Potentially the most bullish potential catalyst for Pinterest is its opening its platform to
ads for products on Amazon. During the Q2 earnings call, Pinterest CEO Bill Ready referenced the "commerciality" of the company's platform. Combining Amazon ads into the content on Pinterest's platform seems like a natural match. More importantly, it provides Pinterest with a new layer of potential business as users have the ability to directly shop for items shown in the content that's being fed to them.
NYSE: PINS
Key Data Points
The winner
Etsy and Pinterest are both trading below their 12-month high and that might be enticing investors to take a look.
In my view, Etsy is the better buy.
When it comes to Pinterest, I view the competitive threat from Meta Platforms (particularly its Instagram app) to be a big risk to the long-term viability of the business.
However, Etsy is beginning to show some encouraging signs of a turnaround. Investors may have lost their enthusiasm for the stock, but the combination of a record number of active buyers, a stabilizing habitual-buyer metric, and a higher take rate offers investors a compelling opportunity to buy shares at a discount. While both companies have a lot of work cut out for them, my bet for long-term success is on Etsy stock.
