It's been a wild ride for Etsy (NASDAQ:ETSY) stock since the company went public last year. After its first day as a publicly traded company, shares closed near $30. Since then, shares have been all over the place. In 2015 alone, shares fell as low as $13.40 and rose as high as $22. Today, Etsy stock is back around all-time lows, trading near $14 at the time of this writing. The volatility of Etsy stock is representative of the confusion among investors about Etsy's growth potential.
When the company reported first-quarter results earlier this year, slower-than-expected sequential growth in active sellers spooked investors. Investors wondered: Is Etsy already approaching the limits of its market of interested sellers? But Etsy eased these concerns when sequential growth in active users started trending higher again.
Sure, Etsy's recent revenue growth certainly suggests the company has plenty of growth ahead. Etsy's first- and second-quarter revenue was up 44% from the year-ago quarter. But investors will need more than historical performance to be confident in future growth.
Is this the catalyst Etsy investors are looking for?
One catalyst for Etsy's business provides hope for more growth to come. This catalyst, if it continues to play out as well as it has recently, could reduce confusion about the company's growth prospects and give investors more confidence in Etsy's opportunity.
What is the catalyst? Etsy's "seller services" segment, which includes revenue from promoted listings, direct checkout, and shipping labels.
Etsy's revenue is categorized into two segments: marketplace and seller services. While Etsy's marketplace revenue, at 59% of total revenue, is the company's larger segment, it's Etsy's seller services segment investors should be getting excited about.
There are two reasons Etsy investors should be interested in this segment. First, it's growing faster than Etsy's marketplace segment. Second, revenue from this segment inherently has high margins, since it is made up mostly of add-on services. To get an idea of how Etsy's seller services segment is performing, and how it is impacting Etsy's business, consider how the segment did during Etsy's second quarter.
Seller Services revenue in Q2 was up 79.5% from the year-ago quarter, handily exceeding the year-over-year growth in its marketplace revenue of 23%. Management said the seller services revenue growth was primarily due to growth in revenue from its promoted listings. But direct checkout and shipping label services also helped drive growth. It's also worth noting that Etsy's reported year-over-year growth in seller serves revenue in Q2 of 79.5% was ahead of 72.3% growth reported in Q1.
The segment's growth also positively affected the company's gross profit margin. The company's Q2 gross profit margin was 64.3%, up 510 basis points from 59.2% in the year-ago quarter. While much of the increase in gross profit was due to leverage in the cost of revenue for employee-related hosting and bandwidth costs, growth in its high-margin promoted listings revenue also played a role in driving profitability higher, management said in the company's second-quarter earnings press release.
Will seller services continue to be a catalyst?
Going forward, management asserts that there is more opportunity for seller services revenue growth -- not just from the current services Etsy is already offering sellers, but also from new ones.
Investors should keep a close eye on this segment of Etsy's business. While management has warned that the segment's year-over-year growth rates will likely begin to decelerate toward the end of the year as the relaunch of its promoted listing hits its first anniversary, investors should still look for the seller services revenue to continue to outpace growth in marketplace revenue. Further, investors should look for management to detail more specific plans for introducing new seller services in the future.
Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of Etsy,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.