2023-07-17 01:58:38 ET
Summary
- Etsy's Q1 results showed mixed results with an increase in male buyers and reactivation of lapsed buyers but a decrease in habitual buyers and gross merchandise sales per active buyer.
- The company plans to improve its search technology and curation to drive more habitual users.
- Despite revenue growth from a transaction price increase and enhancements to its ad product, buyer growth is stagnant and frequent users are declining.
Back in March , I said that while Etsy ( ETSY ) has some growth opportunities ahead of it, that economic softness and vendors selling unlicensed merchandise posed a risk. Overall, I said I was neutral on the name, but saw more risk to the downside. Since then the stock is down -15% versus an over 10% gain in the S&P. Let’s catch up on the name.
Company Profile
As a refresher, ETSY connects buyers and sellers through the operation of its two-sided marketplaces. Etsy.com, where merchants sell crafts, handmade goods, vintage items, and other items, is its main marketplace. Over a quarter of the goods sold on Etsy.com in 2022 were custom or made-to-order merchandise. In 2022, Etsy.com had GMS (gross merchandise sales) of $12 billion.
The company also runs Reverb, a musical instrument marketplace; fashion resale marketplace Depop; and a Brazilian-based marketplace for handmade items and unique goods called Elo7. Reverb had GMS of $943 million in 2022, while Depop's produced GMS of $552 million and Elo7 had GMS of $70 million.
The company breaks out its revenue into Marketplace Revenue, which are required fees, and Services Revenues, which come from value-added services. Marketplace revenue includes things such as listing fees, transaction fees, and payment processing fees. Services Revenue consists of things like shipping labels, on-site advertising, and other services., Marketplace revenue was nearly 75% of the total in 2022, while Services was just over 25%.
Active Buyer Issues
In my original write-up, I noted that attracting more buyers and bringing back lapsed buyers was an opportunity for the company. On that front, the company had mixed results in Q1. One focus was on attracting more male buyers, and the number of male buyers did increase 6% year over year. Another focus was on bringing back lapsed buyers, and in this area. the company said it reactivated 6 million lapsed buyers, which was up 21% year over year. So in those two big areas the company talked about, it did a good job.
Overall, it ended the quarter with 89.9 million buyers, up slightly year over year. It was the first time the company increased its number of active buyers since Q4 2021. However, not everything on the buyer front was positive. Habitual buyers decreased -10% year over year to about 7.2 million. And GMS per active buyer on a 12-month trailing basis decreased -5% to $129. Overall GMS was down -4.6% to $3.1 billion.
As I noted in my most-recent article, ETSY increased the seller transaction fee on its namesake site from 5% to 6.5% last year. This helped drive a 9% increase in transaction fee revenue, while service place revenue also was strong up 14%, helped by enhancement to its Etsy Ads product. While many sellers were upset, the price increase didn’t seem to impact their numbers, with the number of sellers increasing 8% year over year.
CEO Joshua Silverman noted on its earnings call that there are 3 main things that keep buyers from making purchases on a regular basis. One is that buyers often only think about ETSY once they can’t find something anywhere else. The second is that it takes too long to find things given the size of its marketplace. And third, the company thinks that its buyers worry about the post-purchase experience.
One of the big goals of the company to tackle these problems will be to improve its search technology. Discussing this at a Sanford Bernstein Conference , Silverman said:
“Our focus area for this year is being more organized, being more curated and being even more trustworthy. And what do we mean by that? We do a great job now when you have a very clear idea of exactly what you're looking for. … So when you come and you look for something very, very specific, chances are 115 million things for sale in Etsy, we have that very specific thing. Where we don't do a very good job is I'm generally looking to decorate this room. I want the following style. I really like boho, but actually, I'm kind of a little bit more of a mid-century modern kind of person, too. What do you have for me? Etsy, today does not do a great job. And what we tend to do is throw a bunch of listings at you. What about this? What about that? There's a big opportunity to become more curated in that. .. Let me show you a collection of items that are in this taste and style. Let me show you here's a coffee table you already own. Here's rugs that will match with that. Here's a lamp that would look great right over that coffee table. That kind of organization, we are barely scratching the surface of.
"Curation is also a big opportunity for Etsy. When we have humans curate and look at items and pick the items that are well-photographed, well-priced, interesting, unique with a seller that has a great track record of delivering, when a human has actually gone and vetted that, when our merchandising team has vetted it, we know that the conversion rate of that item is substantially higher than what our search engines can do today just using technology. So investing in getting the very best of Etsy to the top so customers can see it, we think, is very fruitful. We can do a lot more there. We think it can yield very big gains, both in driving conversion rate in visit but also driving more repeat purchase because we're showing you just the best of Etsy.“
In addition to trying to improve its search and curation to drive more habitual users, ETSY also wants to ease buyers concerns of using a third-party marketplace. On that front, offered its Etsy Purchase Protection program last year, where it will refund a buyer’s money no questions asked if an item is lost in the mail, damaged, or not as described. The company said the investment has only been about $25 million on $13 billion GMS, so overall pretty small.
While these efforts can certainly help improve buyer frequency and bring back lapsed and add new buyers, the company will also need to get the word out and help change of some its reputation on these issues as well. That may not be easy, and the home décor category that is very much a part of ETSY is also experiencing a tough environment.
Valuation
ETSY stock currently trades around 16.9x the 2023 consensus EBITDA of $753.4 million and about 14.7x the FY2024 consensus of $863.3 million.
It trades at a forward PE of nearly 21.5x the 2023 consensus of $4.30 and just over 18.8x the 2024 consensus of $4.90.
Revenue growth is expected to be 8% this year, and then grow around 10-13% a year over the next few years.
ETSY trades at a similar or higher multiple compared to more mature established marketplaces, but less than higher growth emerging ones.
Conclusion
Given its ties to home décor, ETSY saw a pull-forward in demand stemming from the pandemic that is continuing to fade. While the company has been able to grow revenue, this has come from largely a transaction price increase, as well as some enhancements to its ad product. However, buyer growth overall is pretty stagnant and frequent users are declining, as is how much buyers are spending.
While ETSY management has identified ways it wants to try to fix these issues through improved search, curation, and trust, solving these issues does not look easy. As such, I remain neutral on the name with a slight downside bias.
For further details see:
Etsy: Customer Frequency Is An Issue