Online marketplace Etsy (NASDAQ: ETSY) reported results ahead of analysts' expectations in Q2 FY2023, with revenue up 7.48% year on year to $628.9 million. The company also expects next quarter's revenue to be around $627.5 million, roughly in line with analysts' estimates. Etsy made a GAAP profit of $61.9 million, down from its profit of $73.1 million in the same quarter last year.
Etsy (ETSY) Q2 FY2023 Highlights:
- Revenue: $628.9 million vs analyst estimates of $617.4 million (1.86% beat)
- EPS: $0.45 vs analyst estimates of $0.43 (3.52% beat)
- Revenue Guidance for Q3 2023 is $627.5 million at the midpoint, below analyst estimates of $631 million
- Free Cash Flow of $128 million, up 170% from the previous quarter
- Gross Margin (GAAP): 70%, in line with the same quarter last year
- Active Buyers: 96.3 million, up 2.3 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).
Sales Growth
Etsy's revenue growth over the last three years has been impressive, averaging 42.8% annually. This quarter, Etsy reported mediocre 7.48% year-on-year revenue growth, roughly in line with what analysts were expecting.
Guidance for the next quarter indicates Etsy is expecting revenue to grow 5.56% year on year to $627.5 million, slowing down from the 11.7% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results, analysts covering the company were projecting sales to grow 6.51% over the next 12 months.
Usage Growth
As an online marketplace, Etsy generates revenue growth by increasing both the number of buyers on its platform and the average order size in dollars.
Over the last two years, Etsy's active buyers, a key performance metric for the company, grew 7.6% annually to 96.3 million. This is decent growth for a consumer internet company.
In Q2, Etsy added 2.3 million active buyers, translating into 2.45% year-on-year growth.
Revenue Per Buyer
Average revenue per buyer (ARPB) is a critical metric to track for consumer internet businesses like Etsy because it measures how much the company earns in transaction fees from each buyer. Furthermore, ARPB gives us unique insights as it's a function of a user's average order size and Etsy's take rate, or "cut", on each order.
Etsy's ARPB growth has been mediocre over the last two years, averaging 4.01%. However, the company's ability to continue increasing prices while growing its active buyers shows that buyers still find value in its platform. This quarter, ARPB grew 4.9% year on year to $6.53 per buyer.
Pricing Power
A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Etsy's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 70% this quarter, down 0.7 percentage points year on year.
For online marketplaces like Etsy, these aforementioned costs typically include payment processing, hosting, and bandwidth fees in addition to the costs necessary to onboard buyers and sellers, such as identity verification. After paying for these expenses, Etsy had $0.70 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Etsy's gross margins have been stable over the past year, averaging 70.6%. These robust unit economics, driven by the company's asset-lite business model and strong pricing power, are higher than its peer group and allow Etsy to make more investments in product and marketing.
User Acquisition Efficiency
Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Etsy grow from a combination of product virality, paid advertisement, and incentives.
Etsy is efficient at acquiring new users, spending 38.3% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates relatively solid competitive positioning, giving Etsy the freedom to invest its resources into new growth initiatives.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
This quarter, Etsy's EBITDA came in at $166.2 million, resulting in a 26.4% margin. Additionally, Etsy has demonstrated extremely high profitability over the last four quarters, with average EBITDA margins of 27.3%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Etsy's free cash flow came in at $128 million in Q2, roughly the same as last year.
Etsy has generated $662.7 million in free cash flow over the last 12 months, an eye-popping 24.3% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.
Key Takeaways from Etsy's Q2 Results
With a market capitalization of $12.2 billion, a $1.08 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Etsy has the resources needed to pursue a high-growth business strategy.
It was comforting to see that Etsy topped analysts' revenue expectations this quarter, even if just narrowly. That was a positive. On the other hand, its weak revenue growth was troubling and next quarter's gross merchandise value, revenue, and adjusted EBITDA guidance all missed Wall Street's expectations. Overall, the results could have been better, and the guidance is dragging the stock down. The company is down 5.5% on the results and currently trades at $90.8 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 several reasons why we think Etsy is a great business. While we'd expect growth rates to moderate from here, its revenue growth has been exceptional over the last three years. On top of that, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits and its gross margins are a strong starting point for the overall profitability of the business.
At the moment Etsy trades at 17.3x next 12 months EV/EBITDA. Looking at the consumer internet landscape today, Etsy's qualities stand out, and we like the stock at this price.
Wall Street analysts covering the company had a one year price target of $116.2 per share right before these results, implying that they saw upside in buying Etsy even in the short term.
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