Online marketplace Etsy (NASDAQ: ETSY) reported Q1 FY2023 results topping analyst expectations, with revenue up 10.6% year on year to $640.9 million. However, guidance for the next quarter was less impressive, coming in at $615 million at the midpoint, being 1.57% below analyst estimates. Etsy made a GAAP profit of $74.5 million, down on its profit of $86.1 million, in the same quarter last year.
Etsy (ETSY) Q1 FY2023 Highlights:
- Revenue: $640.9 million vs analyst estimates of $620.9 million (3.21% beat)
- EPS: $0.53 vs analyst estimates of $0.51 (4.35% beat)
- Revenue guidance for Q2 2023 is $615 million at the midpoint, below analyst estimates of $624.8 million
- Free cash flow of $47.4 million, down 83.3% from previous quarter
- Gross Margin (GAAP): 69.5%, in line with same quarter last year
- Active Buyers: 95.5 million, up 424 thousand year on year
Founded by a struggling amateur furniture maker Robert Kalin and his two friends, Etsy (NASDAQ: ETSY) is one of the world’s largest online marketplaces, focusing on handmade or vintage items.
Etsy operates a two-sided online marketplace that connects tens of millions of buyers and sellers around the world with a focus on unique and creative goods that are crafted and curated by individuals or small businesses. Most of its products are in six main categories: home furnishings, jewelry, craft supplies, apparel, paper & party supplies, and beauty & personal care. The company is asset lite: it owns no warehouses, takes no inventory risk, and does not operate a supply chain network.
Etsy offers a differentiated value proposition for its sellers and its buyers. For buyers, it has created a very successful niche to find custom and curated items, from special purpose gifts to everyday items that have added meaning. For sellers, Etsy provides a large global audience for their merchandise, while also offering a range of tools and analytics to manage their online businesses.
Marketplaces have existed for centuries. Where once it was a main street in a small town or a mall in the suburbs, sellers benefitted from proximity to one another because they could draw customers by offering convenience and selection. Today, a myriad of online marketplaces fulfill that same role, aggregating large customer bases, which attracts commission paying sellers, generating flywheel scale effects which feed back into further customer acquisition.
Etsy (NASDAQ: ETSY) competes with a range of ecommerce companies such as Amazon (NASDAQ: AMZN), Walmart (NYSE: WMT), Shopify (NASDAQ: SHOP), and eBay (NASDAQ: EBAY), and increasingly with social commerce companies like Pinterest (NYSE:PINS), and Meta Platforms (NASDAQ:FB).
Sales Growth
Etsy's revenue growth over the last three years has been exceptional, averaging 53.6% annually. This quarter, Etsy beat analyst estimates but reported a mediocre 10.6% year on year revenue growth.
Guidance for the next quarter indicates Etsy is expecting revenue to grow 5.1% year on year to $615 million, slowing down from the 10.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 6.74% over the next twelve months.
Usage Growth
As a online marketplace, Etsy generates revenue growth both by growing the number of buyers on the platform and the average buyer size in dollars.
Over the last two years the number of Etsy's active buyers, a key usage metric for the company, grew 13.6% annually to 95.5 million. This is a solid growth for a consumer internet company.
In Q1 the company added 424 thousand active buyers, translating to a 0.45% growth year on year.
Revenue Per Buyer
Average revenue per buyer (ARPB) is a critical metric to track for every consumer internet product and for Etsy it is a function of the size of the average buyer on the platform and what is Etsy's take rate (cut) from each.
The ability to increase price while maintaining its active buyers shows increasing value of Etsy’s platform. This quarter, ARPB grew 10.1% year on year, reaching $6.71 for each of the active buyers.
User Acquisition Efficiency
Consumer internet businesses like Etsy grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.
Etsy is efficient at acquiring new users, spending 38.8% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a relatively solid competitive positioning, which gives Etsy the freedom to invest its resources into new growth initiatives.
Earnings & Free Cash Flow
Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.
Etsy reported EBITDA of $170.3 million this quarter, which was a 26.6% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 27.7%.
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Etsy's free cash flow came in at $47.4 million in Q1, down 5.77% year on year.
Etsy has generated $658 million in free cash flow over the last twelve months, an impressive 25% of revenues. This robust FCF margin is a result of Etsy asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.
Key Takeaways from Etsy's Q1 Results
With a market capitalization of $12.2 billion, more than $1.04 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
It was good to see Etsy outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak. Overall, this quarter's results were mostly in line. The company is up 8.1% on the results and currently trades at $107.02 per share.
Is Now The Time?
Etsy may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think Etsy is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last three years. And while its ARPU is growing slowly, the good news is its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its impressive EBITDA margins show massive profitability of the business.
At the moment Etsy trades at next twelve months EV/EBITDA 17.9x. Looking at the consumer internet landscape today, Etsy's qualities stand out, and we like the stock at this price.
The Wall St analysts covering the company had a one year price target of $131.2 per share right before these results, implying that they saw upside in buying Etsy even in the short term.
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