Etsy (ETSY 0.34%) thinks its stock is a pretty good deal right now -- at least, that's the impression investors got from the marketplace platform provider's recent earnings announcement.
In that report, management revealed that it spent $100 million on stock repurchases in the past quarter. The initiative represented a shift toward returning more capital to shareholders through buybacks, executives explained.
Let's take a look at that move, and whether investors should see it as a signal to buy the stock today.
Spending cash
Etsy has a capital-light selling model that relies on simply connecting merchants with buyers, avoiding expensive e-commerce steps such as inventory and fulfillment. Free cash flow, as a result, is strong and landed above $600 million in each of the last three fiscal years.
The difference now is that management is returning more of that cash directly to its shareholders. Executives spent roughly 90% of free cash flow in 2023 on stock buybacks. The move, CFO Rachel Glaser said in a press release, represents a "shift in our capital return strategy to more intentionally return a higher percentage of free cash flow" through repurchase spending. Etsy says the buybacks will be opportunistic and will spike when the stock's valuation is "meaningfully below our view of fair value."
Price check
That value has certainly changed in recent quarters. Shares are priced at just 3.6 times annual sales, marking the lowest valuation that investors have seen in the post-pandemic period. That's not far from the price you'd pay for eBay, a slower-growing and more mature marketplace business.
Still, there are some good reasons for the discount on Etsy's shares. Transaction volumes on its platform have been essentially flat for the past two years, meaning it is struggling to add value for its merchants by boosting their sales. As for its buyer pool, that key metric is expanding at a faster rate than it is for eBay. However, the most recent 3% uptick is hardly impressive compared to the 18% spike that shareholders saw during the high-growth phase of the pandemic.
Watch instead
Etsy is a bigger and stronger business today than it was before the pandemic struck. That's clear from factors like its doubling of the buyer pool in the past four years, its increased average spending rates, and the higher proportion of buyers who return to make more purchases. Yet it appears as though Etsy pulled several years of growth ahead from future years during its massive expansion in 2020 and 2021.
Until the e-commerce business can show sustainable transaction volume gains, then, investors will want to watch the stock right now. There are more attractive options in the e-commerce space, such as Shopify, which is targeting near-30% revenue growth in 2024 following a 20%-plus sales increase this past year.
It's good news that Etsy has stabilized its business and is on a path toward higher profitability. Its positive cash flow also gives executives flexibility to invest more in the business or boost direct shareholder returns, as they have in recent quarters. Most investors won't want to follow the management team's lead into buying Etsy stock right now, though -- at least not until there's a clear sign of rebounding growth.
