Back in OctoberI updated Etsy (NASDAQ:ETSY) to “Buy”, not to mention that although the stock had been pummeled this year, the company had also made progress by increasing the number of active buyers on its platform. as gaining ground in international markets. With the stock up more than 25% since then, let’s catch up on the name.
As a reminder, ETSY operates several online marketplaces that connect buyers and sellers. Its largest and best known is Etsy.com, which specializes in selling crafts, handmade items, and vintage items. It also owns Reverb, a musical instrument marketplace, and Depop, focused on fashion.
ETSY divides its revenue into two main categories. Marketplace revenue consists of listing fees, transaction fees, and payment processing fees. Service revenue, on the other hand, includes things like shipping labels, on-site advertising and others services.
Profits, prospects, restructuring and new competition
Ahead of its published third quarter results in November, I said I expected ETSY to beat both high and low estimates (it did), but to be cautious about the fourth quarter. So far, that seems to be the case.
At the time of its third-quarter report, ETSY forecast GMS falling by low single digits, but warned that if trends worsened, it could fall by mid-single digits. . It estimates a subscription rate of 20.8% and an adjusted EBITDA margin of between 26 and 27%.
In mid-December, the company updated these tips when he announced a restructuring. It forecast a decline in GMS of between -2% and -1%, and revenue growth of 2% to 3%. It also increased its EBITDA margin forecast to 27-28%.
As for the restructuring, the company will lay off 11% of its workforce at the Etsy marketplace, costing it between $25 million and $30 million. The company said the restructuring would result in significant operational efficiencies as well as cost savings and/or avoidance.
Increased competition is an investor concern when it comes to ETSY, and the company addressed some of it during a conference at NASDAQ. earlier this monthwith CEO Joshua Silverman saying:
“Temu came out of nowhere to reach a turnover of around $14 billion. So they take a small share from everyone. We have no evidence to suggest they have a disproportionate impact on Etsy. They affect everyone in e-commerce, and we see no evidence that they have a disproportionate impact on Etsy. But in a world where consumers’ wallets are limited, that $14 billion has to come from somewhere. I think the biggest impact we’re seeing for Etsy right now is that Temu and Shein, and especially Temu, seem to be investing a lot in performance marketing, and it’s not clear that they have a big focus return on investment on their expenses. So they seem to be spending a lot of money acquiring customers who may not have very big wallets and may not be very loyal. So we’ll see how this strategy of spending a lot to acquire customers whose lifetime value is uncertain works. I don’t know how this will work out for them. We will see. But we’re not a growth-at-all-costs company, and we’ve never been that way. We really care about the return on investment of every dollar that we spend, and we look at every dollar that we spend on employees, on marketing and we say, is producing good returns on investment improving the market in a way that delivers value to the seller, buyers and for our shareholders. And so, to the extent that they’re bidding on keywords in performance marketing bidding, we’re not going to be in a race to the bottom.
ETSY’s Q3 earnings and Q4 guidance were about as I expected when I upgraded the stock. It beat both the top and bottom lines and issued what appears to be conservative forecasts, given that it had already given a more positive outlook later in mid-December. With the GMS and revenue forecast, it’s also important to remember that it now excludes Elo7, which has been divested.
Overall, ETSY continues to make good progress adding buyers, once again re-accelerating growth during the quarter. Active buyers on Etsy Marketplace increased 4% to 92 million. This is an acceleration from the 1% growth recorded in the first quarter and 3% in the second quarter. The number of U.S. buyers also increased for the first time in seven quarters. Another goal was to bring back inactive buyers. In the third quarter, the company reactivated 6 million inactive buyers, a 19% year-over-year increase. This is a similar result to the first and second quarters.
Its performance with Etsy Ads shouldn’t be overlooked either, as it adds nice growth as well. I also like that the company has finally stemmed the decline in the loss of repeat buyers. Habitual buyers declined 6.5% year-over-year to around 7.0 million, but remained flat sequentially.
In a macroeconomic environment that is not the easiest and coming out of a period of demand resulting from the pandemic, the company has done a very good job in these circumstances.
Competition is certainly a risk. Temu is growing rapidly and at all costs, while the TikTok market appears to be using a similar growth-at-all-costs strategy. Even craft store Michael’s has launched a competing online marketplace called MakersPlace.
The emergence of Temu, property of PDD (PDD) was quick and the Chinese company seeks to convince American consumers at all costs. TikTok Marketplace has also taken the United States by storm, and with its popular social media platform and huge deals, it is also quickly racking up sales. This is something investors in ETSY and other online retail names will need to watch to see if these Chinese newcomers have any impact on them. However, I agree with ETSY management that buying customers in big deals doesn’t necessarily make them loyal customers, and they certainly aren’t profitable customers.
So far, ETSY has more than held its own against this new competition. For my part, although I recognize the risk, I now feel comfortable with this new risk.
ETSY stock currently trades at approximately 14.1 times 2024 consensus EBITDA of $791.4 million and approximately 12.5 times 2025 consensus EBITDA of $889.1 million.
It trades at a forward PE of nearly 14 times the 2024 consensus of $4.80 and just over 13.2 times the 2025 consensus of $5.53.
Revenue growth is expected to be nearly 6% in 2024, then around 9-13% annually over the next few years.
In valuing ETSY, I would place around a 15x multiple of 2025 EBITDA to get the fair value. That would give him a target of around $100. This is the same as my previous goal.
ETSY is doing a good job in my opinion, and being able to increase its number of active buyers in today’s environment is impressive. It’s also worth noting that the platform has also attracted more sellers, despite a much-publicized price increase in 2022.
International markets remain an opportunity, as does increasing user frequency and attracting more men to the platform. So far, my thesis appears to be coming to fruition, while the remaining upside from my $100 target keeps it in “Buy” territory.
The biggest risks to the stock are a slowdown in consumption, as well as any pressure from increased competition. As long as the economy holds up, I think ETSY should have a pretty good 2024.