Etsy (ETSY) released its third-quarter earnings report on November 1, 2023. Here’s Morningstar’s take on Etsy’s earnings and stock.
Earnings were pretty strong in the third quarter. The firm had 1.6% gross merchandise volume, or GMV, growth in the core Etsy platform, along with growth in active buyers on the core marketplace for the first time in seven quarters. The firm beat our expectations for sales ($636 million to our $630 million estimate), GMV ($3.04 billion to our $3.02 billion estimate), and adjusted EBITDA margin (28.6% to our 27.3% estimate).
A lingering issue was lower-than-expected guidance for the fourth quarter, which drove negative reactions from investors. Softer buyer traffic in October led Etsy to guide for a slight decline in gross merchandise sales in the holiday quarter. Investors are still trying to decide whether the marketplace can return to strong double-digit growth coming out of this rough cyclical patch for consumer discretionary spending.
The big thing investors should keep an eye on is a modest decline in platform spending per active buyer, which we believe fell slightly to about $127 on a trailing 12-month basis. An important part of the thesis is the firm’s ability to grow not just its base of active customers, but also how frequently they visit and how much they spend. We don’t know that the results were unexpected; during periods of economic pressure, we typically see consumers remain active but make fewer or cheaper purchases. The trick will be driving an inflection in 2024 or 2025. What gives us more comfort than the street is that spending patterns among new buyers have been pretty encouraging. The firm saw a 20% increase in spending from households in the top decile of income, suggesting that when pressures ease and the median consumer is feeling better, we’ll likely see a strong return to growth.
There is some dissonance between the firm’s valuation, which is up about 30% from the third quarter of 2019, and its operational performance, with the marketplace boasting 3 times the revenue and 6 times the operating profit that it did in that period. On a P/E basis, the firm trades as if it’s never going to return to growth, which seems shortsighted. With Etsy growing its share in its four largest verticals relative to pure-play competitors and defending its share inclusive of discounters like Walmart (WMT) and Amazon (AMZN) (which is impressive, given where consumer psychology is today), we expect that gap between market prices and our intrinsic valuation to narrow as consumer discretionary spending recovers.
Key Morningstar Metrics for Etsy
• Fair Value Estimate: $145.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Very High
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