Shares of e-commerce company Etsy (NASDAQ: ETSY) are trading 12% lower in pre-market today after the company announced Q1 results on May 4.
Etsy reported sales of $579.3 million and adjusted earnings per share of $0.60 in the quarter ended in March. Comparatively, analysts forecast Etsy to report revenue of $575.44 million and earnings of $0.60 in Q1. In the year-ago period, Etsy’s sales stood at $529.77 million while earnings were $1 per share.
So, why is Etsy stock trading lower despite beating revenue estimates in Q1? Apparently, investors were not impressed with the company’s guidance for Q2 where it forecast sales between $540 million and $590 million. Wall Street expected the company to report revenue of $628 million in the June quarter.
Let’s see what drove Etsy’s results in Q1 and if it should be part of your equity portfolio right now.
Esty reported a GMS of $3.3 billion in Q1
In Q1, Etsy reported gross merchandise sales or GMS of $3.3 billion, an increase of 3.5% year over year. The GMS is basically the total number of merchandise sold on the Etsy platform in a particular period. It also confirmed GMS for the Etsy marketplace stood at $2.8 billion, a decline of 2% year over year.
Josh Silverman, Etsy’s CEO stated, “Despite continued uncertainty and macroeconomic headwinds, Etsy continues to rise to the occasion to deliver solid results that show us maintaining most of the gains reported during the extremely strong year-ago period.”
While growth has decelerated for Etsy in Q1, the company has increased sellers by 100% on its platform to 5.5 million while the number of buyers has increased by 80% to 89.1 million in the last two years. The expansion of the Etsy ecosystem has allowed it to more than double GMS since Q1 of 2020.
In the March quarter, Etsy added seven million buyers and now has close to 90 million buyers across 250 countries. Around 15 of the company’s product categories attracted more than one million buyers last year while seven of these categories had more than 15 million unique buyers.
ETSY aims to increase engagement and customer base
The majority of Etsy’s active buyers are located in the U.S. allowing the company to target other markets for top-line growth. Its all-time buyer penetration is below 50% in all seven core markets while these rates in the next 15 markets beyond the U.S. and U.K. are 80% lower.
In order to engage and retain buyers, Etsy aims to focus on improving transparency for global shipping procedures while also improving tooling functionalities for sellers.
The company’s product development expenses as a percentage of revenue rose to 15% in Q1 of 2022, compared to 10% in the year-ago period. In 2021, product development expenses totaled $272 million, compared to $97 million in 2018. This year, these costs are on track to surpass $350 million.
In order to expand its customer base, Etsy will also ramp up marketing spending this year. In Q1, marketing spends accounted for 16% of sales, compared to 13% of sales in the year-ago period.
The final takeaway
The ongoing pandemic acted as a massive tailwind for Etsy and other e-commerce players. However, as lockdown restrictions were relaxed, consumer spending trends shifted towards other segments. But Etsy continues to maintain prior-year GMS levels despite a challenging macro-environment.
Right now Etsy is valued at a market cap of $12.5 billion and the company is forecast to end 2022 with sales of $2.50 billion, valuing the company at a price to forward sales multiple of 5x.
Analysts expect ETSY stock to report adjusted earnings of $3.3 this year, indicating a price-to-earnings ratio of 33x. While these multiples are reasonable for a growth stock, Etsy might continue to move lower if market sentiment remains bearish.