Online marketplace Etsy (NASDAQ: ETSY) reported results ahead of analyst expectations in the Q2 FY2022 quarter, with revenue up 10.6% year on year to $585.1 million. However, guidance for the next quarter was less impressive, coming in at $557.5 million at the midpoint, being 2.18% below analyst estimates. Etsy made a GAAP profit of $73.1 million, down on its profit of $98.2 million, in the same quarter last year.
Etsy (ETSY) Q2 FY2022 Highlights:
- Revenue: $585.1 million vs analyst estimates of $556.8 million (5.07% beat)
- EPS (GAAP): $0.51
- Revenue guidance for Q3 2022 is $557.5 million at the midpoint, below analyst estimates of $569.9 million
- Free cash flow of $117.7 million, up 134% from previous quarter
- Gross Margin (GAAP): 70.7%, down from 71.8% same quarter last year
- Active Buyers: 93.9 million, up 3.45 million 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).
Etsy's revenue growth over the last three years has been exceptional, averaging 59.1% annually. The initial impact of the pandemic was positive for Etsy's revenue, but growth rates subsequently normalized.
This quarter, Etsy beat analyst estimates but reported an mediocre 10.6% year on year revenue growth.
Guidance for the next quarter indicates Etsy is expecting revenue to grow 4.7% year on year to $557.5 million, slowing down from the 17.9% 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 9.37% over the next twelve months.
As a online marketplace, Etsy generates revenue growth both by growing the number of buyers using the platform and how much each of those buyers spends.
Over the last two years the number of Etsy's active buyers, a key usage metric for the company, grew 34.6% annually to 93.9 million users. This is among the fastest growth of any consumer internet company, indicating that users are excited about the offering.
In Q2 the company added 3.45 million active buyers, translating to a 3.82% growth year on year.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Etsy it a function of how much its users spend on the platform and what is Etsy's take rate (cut) from each transaction.
Etsy’s ARPU growth has been decent over the last two years, averaging 8.62%. The ability to increase price while still growing its user base shows the value of Etsy’s platform. This quarter, ARPU grew 6.56% year on year, reaching $6.22 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 38.1% 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's EBITDA came in at $162.7 million this quarter, which translated to a 27.8% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 29.6%.
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 $117.7 million in Q2, roughly the same as last year.
Etsy has generated $530.3 million in free cash flow over the last twelve months, an impressive 21.9% of revenues. This extremely high FCF margin is a result of Etsy asset lite business model 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 Q2 Results
With a market capitalization of $11.8 billion, more than $1 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.
We liked to see that Etsy beat analysts’ revenue expectations pretty strongly 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 overall still quite weak. Overall, this quarter's results could have been better. The company currently trades at $96.7 per share.
Is Now The Time?
When considering Etsy, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Etsy is a good business. Its revenue growth has been exceptional. And while its ARPU is growing slowly, the good news is its user growth has been strong, and its impressive EBITDA margins show massive profitability of the business.
The market is certainly expecting long term growth from Etsy given its EV/EBITDA ratio based on the next twelve months of 19.6x is higher than many other consumer internet companies. There are definitely things to like about Etsy and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the consumer internet stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.
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