There's no question that 2023 has been a rough year for Etsy (ETSY 0.34%).
While other e-commerce stocks like Amazon, Shopify, and Wayfair have bounced back from their post-pandemic lows, Etsy has continued to sink even lower. It fell again on its third-quarter earnings report, which came out on Wednesday.
Growth in gross merchandise sales (GMS), or the total value of goods sold on its platform, remained anemic in Q3, up just 1.2% to $3 billion. Revenue rose 7% to $636.3 million, benefiting from earlier fee hikes, and that topped the consensus at $629.8 million.
On the bottom line, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from $167.8 million to $182.2 million. Earnings per share came in at $0.64, topping estimates at $0.49.
While Etsy beat the analyst consensus even with weak top-line growth, guidance turned off the market. For the key holiday quarter, Etsy actually expects GMS to decline in the low single digits. It sees a similar take rate to Q3, and generally stable adjusted EBITDA margin of 26% to 27%.
However, the expected decline in GMS is clearly a warning sign. On that note, let's take a look at one red flag and one green flag for Etsy right now.
Image source: Getty Images.
Etsy's red flag: Growth hasn't returned
Etsy's business has a lot of attractive features, including a marketplace model with a unique focus on handmade and vintage goods that benefits from network effects and switching costs.
However, that value proposition only works for investors if the business is capable of delivering growth. Etsy argues that the company has a unique position in a large addressable market, but its recent struggles to grow GMS following a boom during the pandemic show that the market for the goods it sells could be smaller than it thinks. Given the company's guidance, GMS is set to be down two years in a row, making 2022 and 2023 essentially dead years for the company.
In Etsy's guidance for the fourth quarter, CEO Josh Silverman explained: "There's no doubt that this is an incredibly challenging environment for spending on consumer discretionary items. It's therefore important to acknowledge that this volatile macro climate will make it challenging for us to grow this quarter."
Certainly, other discretionary retailers are struggling in the current environment, but Etsy is underperforming its e-commerce peers, and it's reasonable to ask when or even if Etsy's growth will reaccelerate.
Etsy's green flag: Users are coming back
Despite the disappointing financial results, there is one category in which Etsy is showing signs of a turnaround. Growth in active buyers accelerated on the Etsy marketplace, up 4% to 91.6 million, and U.S. active buyer trends returned to positive year-over-year growth for the first time in seven quarters. Etsy reactivated 6 million buyers, a 19% increase from the quarter a year ago, and retention of active buyers is above pre-pandemic levels. GMS per active buyer is down 6% to $127, possibly a reflection of the economic challenges Silverman referred to above.
Meanwhile, its seller base is growing rapidly, up 19% to 8.8 million at the company overall, and Etsy marketplace added 400,000 sellers in the quarter to bring the total to 6.7 million, up 6% from the previous quarter. Sellers could be coming to the platform in search of supplementary income as they cope with inflation and other economic pressures.
Is Etsy a buy?
Etsy still has a number of strengths, including its profit margins and unique marketplace, but it's clear that the business is facing significant challenges.
Over the long term, the company still looks poised for growth, but it could take several more quarters for the headwinds in the consumer discretionary sector to pass.
Interested investors should put Etsy on their watchlists, but it's worth waiting for clearer signs that the business is turning the corner, especially after the disappointing fourth-quarter guidance.
