Etsy (NASDAQ: ETSY) is an online marketplace that lets buyers and sellers across the world connect with each other. However, it is a marketplace with a difference. While most marketplaces sell everything (legal) under the sun, Etsy.com only sells handmade and antique goods. Etsy primarily lets artisans and entrepreneurs connect with their potential customers.
Etsy also operates Reverb: a musical instrument marketplace, Depop: a resale market for fashion, and Elo7: a marketplace for handmade and unique items. At the end of 2021, it connected around 7.5 million active sellers with 96.3 million active buyers.
The ongoing year has not been a great one for growth stocks and there has been a broad decline in the value of many stocks in the last six months. Rising inflation levels and measures by the US Fed to curb it have caused havoc across financial markets. Etsy stock too has lost more than 65% of its value in the past six months and is still struggling. However, is this decline a buying opportunity?
Etsy continues to face hindrances
The e-commerce sector was one of the biggest beneficiaries of the pandemic. As people were locked up in their homes and retail stores were shut down, companies such as Etsy thrived. However, now the company is suffering from various short-term challenges.
Firstly, with inflation rising to its 40-year high and interest rates climbing up the consumers' confidence in this growing sector is slowly slipping away. Concerns of a potential recession aren’t helping either. With the reopening of the brick-and-mortar stores, the level of competition has also increased for companies like Etsy.
The prospects of the e-commerce industry are still huge. Etsy already has a specific niche of artisans, craft suppliers, and vintage goods dealers under its umbrella and is making significant efforts to expand internationally as well.
It has built a significant base of customers in the UK and Germany and is also expanding further into other EU nations. Moreover, it has an addressable market of $2 trillion and is currently serving only a fraction of it. All these factors indicate Etsy still has a lot of potential and the short-term hindrances cannot destroy its future prospects.
Etsy experiences a decline in revenue growth
The supply chain issues and inflation levels have disrupted the revenue growth at Etsy. The reduction in revenue growth in Etsy has been quite dramatic. In the first quarter of this year, there was only a 5% year-over-year increase in the company’s revenues which rose to $579 million compared to revenue growth of 141.5% and 35% recorded in the same period in 2021 and 2020 respectively.
Net income came in at $86.1 million or $0.60 per share which was also 40% down year-over-year. Further, the adjusted EBITDA margin too saw a 6% decline from last year’s levels. Other than the disruptive environmental factors, the increase in the operating expenses by more than 25% might have also been a catalyst that triggered such a reduction in the income levels.
Etsy expects for the next quarter its adjusted EBITDA margin will reduce further to 25% and its revenues might stand between the range of $540 million and $590 million.
Etsy has over 89.1 million active buyers at present and remarkably the company’s customers have grown by over 89% in the past two years. However, this time the active buyers had actually declined by 900,000 compared to the 91% jump observed a year ago.
Moreover, the repeat buyers or habitual buyers i.e., the ones who had made at least thirteen purchases in the trailing-12-month period remained constant at 8 million. However, as Etsy’s largest product category is homewares and home furnishings, finding repeat customers in this category can be challenging in such tough times.
Etsy stock closed on June 16 at $69. The average analyst target for the stock is $144.5, a potential upside of over 100%. Etsy is still cheaper than what it used to be and is trading at 25 times its forward earnings. Therefore, it looks like an absolute bargain at current multiples.