Niche-based eCommerce player Etsy (ETSY) defied the odds with its remarkable second-quarter showing. It beat analyst estimates across both lines, despite the challenging economic situation. Moreover, with the acquisition of firms such as Elo7 and Depop, it continues to expand its addressable market. Hence, we are bullish on ETSY stock.
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Etsy is a marketplace that specializes in handmade creations and unique items. According to its management, the company has a massive addressable market of over $100 billion and based on last year’s revenues, there is massive potential for expansion.
Moreover, its management has a brilliant track record of executing its plans and pulling the right levers for growth. Also, with its stock trading at multi-year lows, it’s a deal that investors can’t pass up now.
Etsy Reported Robust Second Quarter Results
Etsy’s second-quarter results came in much better than expected despite market headwinds. Etsy’s adjusted earnings per share of $0.51` beat estimates by $0.19, while revenues of $585 million beat estimates by $28.3 million. These results were a testament to Etsy’s robust business model, likely to evolve post-pandemic and sustain growth. Despite the drop in gross merchandise sales, Etsy’s second quarter results were encouraging.
The company is lapping tough comps with new headwinds and stabilizing buyer trends. Nevertheless, it was able to post a 3% margin improvement on a year-over-year basis regarding adjusted EBITDA numbers, which points to its ability to adjust variable expenses effectively.
The results are likely even better if we exclude the impact of its two new acquisitions in Depop and Elo7. These acquisitions will boost the company’s top and bottom lines in the future, allowing it to gain a stronger foothold in new markets.
Total active sellers were impressive during the quarter, down just 3.6% sequentially. Following an increase in its fees at the conclusion of the first quarter, it was imperative to see whether it impacted active sellers. Despite sellers’ concerns, the platform’s solid reputation gives it the edge over its competition and the ability to make pricing adjustments without losing its active buyers and sellers.
Etsy’s Ad Business Continues to Shine
Etsy has grown its advertising business exponentially over the past five years. Its platform provides incredible value to buyers and sellers. It has effectively carved out a niche in the eCommerce space focusing on handmade products. Moreover, it has effectively leveraged its growing active user base to expand its advertising business.
It continues to improve ad relevance for its sellers, which is why seller ad budgets are up by double-digit margins from the prior-year period. Etsy Ads sales have risen by a whopping 516% over the past five years, outpacing Etsy marketplace growth by more than 200%.
The company has done exceedingly well in applying new machine learning techniques and providing more relevant ad inventory for buyers without impacting conversion rates. Moreover, it has maintained listing relevance in line with organic search results. Additionally, seller budgets are up over 80% year-to-date as the platform continues to ramp up ad offerings.
Etsy’s network effects have proven to be vital for the company’s massive competitive advantage. Its underlying business continues to grow stronger as more users signup for the platform. Naturally, as more users signup on to any online platform, it facilitates the creation of a sticky ecosystem.
The same goes for Etsy’s ad business, as higher ad spending leads to greater competition, and more competition effectively leads to higher spending across the board. With more sellers using Etsy’s ad tools and pouring more money onto the platform, it becomes more valuable over time.
Is Etsy a Good Stock to Buy Now?
Turning to Wall Street, ETSY stock maintains a Moderate Buy consensus rating. Out of 17 total analyst ratings, 10 Buys, seven Holds, and zero Sells were assigned over the past three months. The average ETSY price target is $114.33, implying 9.7% upside potential. Analyst price targets range from a low of $83 per share to a high of $168 per share.
Conclusion: ETSY Stock Near Lowest Valuation despite Outstanding Quarter
Etsy stands out as an anomaly in the eCommerce realm. Despite the inconducive market conditions, it wrapped up another incredible quarter, where it handily beat analyst estimates. However, its stock trades near its lowest-ever historical valuation. Many had felt that the fee hike by Etsy would significantly impact its user base, but that hasn’t been the case. The transformation during the pandemic has led to an evolution in Etsy’s business, which is apparent from its strong results.
Though it faces some short-term headwinds, the long-term potential of the eCommerce market remains massive. Its differentiated eCommerce offering will continue to thrive and add value to its seller and buyer base. Moreover, its ads business continues to shine and boasts a massive growth runway ahead.
Therefore, there’s much to like about its capital-light, high-margin business model, which remains stronger than ever. As my colleague Chandrima Sanyal says, investors should look past the short-term pain and look at the bigger picture with ETSY.
