Etsy (NASDAQ:ETSY) Beats Q3 Sales Targets, Stock Soars

Full Report / January 11, 2023
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Online marketplace Etsy (NASDAQ: ETSY) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 11.6% year on year to $594.4 million. The company expects that next quarter's revenue would be around $740 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Etsy made a GAAP loss of $963 million, down on its profit of $89.9 million, in the same quarter last year.

Etsy (ETSY) Q3 FY2022 Highlights:

  • Revenue: $594.4 million vs analyst estimates of $564.2 million (5.36% beat)
  • Revenue guidance for Q4 2022 is $740 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $198.5 million, up 60.9% from previous quarter
  • Gross Margin (GAAP): 70.6%, in line with same quarter last year
  • Active Buyers: 94.1 million, up 4.74 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 exceptional, averaging 57.4% annually. 

Etsy Total Revenue

This quarter, Etsy beat analyst estimates but reported mediocre 11.6% year on year revenue growth.

Guidance for the next quarter indicates Etsy is expecting revenue to grow 3.18% year on year to $740 million, slowing down from the 16.1% 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 6.44% over the next twelve months.

Usage Growth

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 27.4% annually to 94.1 million users. This is a fast growth for a consumer internet company.

Etsy Active Buyers

In Q3 the company added 4.74 million active buyers, translating to a 5.31% 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 ARPU

Etsy’s ARPU growth has been almost flat over the last two years, averaging 2.8% quarterly. The ability to maintain ARPU while growing its user base shows the stable value of Etsy’s platform. This quarter, ARPU grew 6.02% year on year, reaching $6.31 for each of the active buyers.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Etsy grow by a combination of product virality, paid advertisement or incentives.

Etsy is efficient at acquiring new users, spending 38.2% 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 $167.7 million this quarter, which was a 28.2% margin. Over the last twelve months the company has been amongst the handful of the most profitable consumer internet business with EBITDA margins of 28.5%.

Etsy Adjusted EBITDA Margin

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 $198.5 million in Q3, up 127% year on year.

Etsy Free Cash Flow

Etsy has generated $655.1 million in free cash flow over the last twelve months, an impressive 26.4% 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 Q3 Results

Sporting a market capitalization of $11.5 billion, more than $1.04 billion in cash and with positive free cash flow over the last twelve months, we're confident that Etsy has the resources it needs to pursue a high growth business strategy.

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, revenue growth is overall a bit slower these days. Zooming out, we think this was still a decent, quarter, showing the company is staying on target. The company currently trades at $128.00 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 solid business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last three years. And while its ARPU has been stagnating, the good news is its user growth has been strong, and its impressive EBITDA margins show massive profitability of the business.

At the moment Etsy trades at next twelve months EV/EBITDA 15.4x. There are definitely things to like about Etsy and looking at the consumer internet landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $120.4 per share right before these results, implying that they saw upside in buying Etsy even in the short term.

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