Was The Market Wrong Again On Etsy As Shares Gained After Earnings?

ETSY (NASDAQ:ETSY) is an American e-commerce company focused on handmade, vintage and craft related items. They sell a wide range of products including jewelry, bags, clothing, home decor and art. Etsy shares were up 10% during market hours and 1.7% in after-hours trading, as results were better than expected. Other e-commerce companies like Shopify (NYSE: SHOP) Benefits were also seen, as the results came out better than expected, with negative sentiment already baked into the evaluation. Etsy shares are down more than 65% from their 52-week highs.

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-Gross merchandise sales declined 0.4% year-on-year.

-Revenue increased by 10.6% compared to the same period last year, to arrive at $585 million.

Net income declined 25%, meanwhile adjusted (non-GAAP) EBITDA increased 16.7%.

Rachel Glaser, Etsy, Inc. “Despite strong macroeconomic headwinds and challenging year-over-year comparisons, second-quarter revenue grew more than 10%,” said U.S. chief financial officer. ‚ÄúThis growth is due to the Etsy Marketplace transaction fee increase, the addition of Depop and Allo7 to our House of Brands portfolio, and the strength of our Etsy Advertising product, which continues to be a great solution for sellers looking to grow their business. We’re pleased that Etsy’s highly variable cost structure helped drive a strong second quarter adjusted EBITDA margin of 28% and operating cash flow of $125.8 million.

Etsy’s gross merchandise sales continued to struggle as a base effect from 2021 and economic weakness continued to weigh on the result. The company continues to improve its business model as it becomes relevant once again. For years management had indicated that the potential addressable market for their business was over $100 billion, and growth would remain strong for several years, but the results haven’t been matching expectations.

Etsy is focusing on improving the overall experience of its product as it improves customer retention and repeat sales. Some of those improvements have started to pay off, as the current quarter saw a 30% drop in dead-end searches, as search improved through a number of advancements. The company also continued to improve its ad ranking capabilities, which resulted in Etsy’s profitability. A new buyer protection program was also introduced and the 1 . should be online afterscheduled tribe of August, which will help sellers and customers who sell or buy items for less than $250 get a refund if the order doesn’t match expectations.

The company has struggled to expand beyond the North American market, but management is working to improve its go-to-market strategy for the international market as it is back on track toward growth.

The biggest reason for Etsy’s slowdown can be attributed to their overall strategy, where they’ve attempted to offset the slowdown in growth by raising their fees from 5% to 6.5%, and more than the 3% that Etsy charges. . few years ago. As a result many sellers were laid off and moved away from the platform, resulting in a slowdown in merchant growth. Etsy didn’t report its merchant growth for the quarter, but the numbers were likely worse. In addition, the number of active buyers fell 2% to 88 million. Repeat buyers are classified as those who spend more than $200 within a 12-month period.

To offset the struggle to sell merchandise, Etsy’s management has turned to advertising sales to increase revenue. This strategy remains watchful, despite the fact that advertising budgets increased by 80% during the quarter, as ads are highly dependent on demographics. The company continues to focus on product development with a product and development budget that increases from 10% to 12% of revenue. But given the purchasing power and demographics of Etsy’s customers, a premium product may not suit the sensitivity of the market.

Evaluation of ETC

Etsy continues to have relatively aggressive valuations of 6x price-to-sales and forward price-to-earnings (P/E) of 36x. Investors continue to invest in the company because of the belief that the company will be able to transform its business. business eventually. One of the reasons for the higher valuation is gross margin which currently stands at 71%, and profit margin pre-adjustment is around 12-14%. Investors believe the asset-light nature of the business could ensure that profit margins could grow by 20-30% over the long term, resulting in increased profits, making the current valuation justified. Moreover, metrics like return on investment and return on equity also remain strong at 16% and 71% respectively, which helps as long as the company is growing

Etsy shares jumped because the results weren’t as negative as the market had hoped. But the current business model is clearly struggling and the company may have to cut fees to get back on growth in its core business.