2023-09-22 10:08:24 ET
Summary
- Etsy's active buyer growth increased by 3%, highlighting the platform's resilience and potential for future expansion.
- Despite stable growth rates, Etsy's valuation remains low, with a focus on generating strong free cash flows and flexibility to manage its net debt.
- Etsy's ability to maintain a stable business and produce robust cash flows at approximately 11x forward free cash flows suggests a positive risk-reward scenario for investors.
Investment Thesis
Etsy, Inc.'s ( ETSY ) share price is back at the level it was in 20219. Can you imagine this? What makes this share price performance particularly startling is when we consider the overall context for Etsy.
As we go through, you'll see ample reason to ascertain that including some pesky detractions to the bull case, there are a lot more positives than its share price performance would lead you to believe is warranted.
Yes, there was a time in the recent past when it made sense to be bearish on Etsy. I fully recognize that aspect, as I too was bearish, see here .
But I believe that since then, Etsy's made strong progress as it continues to deliver some top-line growth. In sum, I believe there's a positive risk-reward in this stock.
Etsy's Near-Term Prospects
Etsy is an online two-sided marketplace that connects independent artisans and sellers with potential buyers seeking unique and handcrafted products, including handmade crafts and vintage items. The platform serves as a digital marketplace where creative individuals can market and sell their distinctive creations to a large audience, enabling them to grow their businesses and reach customers who appreciate one-of-a-kind offerings.
Followers of my work will know how much emphasis I put on customer adoption curves. What you see below are two things.
Firstly, the business is far from dying. After all, Etsy just reported a 3% increase in active buyers. This, to me, is arguably the most insightful aspect of where the whole bull case can and should be built.
Secondly, while slightly less important, but important nevertheless, active buyers reached an all-time high in Q2! This again echoes my assertion that Etsy's platform is far from dying, even though its share price action of late has been truly lackluster.
With an eye toward the future, Etsy is committed to enhancing the user experience through investments in search and curation technology as well as the provision of high-quality listings to draw in and keep customers. Along with that, Etsy places a strong emphasis on customer service, trust, and safety while assisting sellers in expanding their companies.
Simply put, Etsy is working to increase conversion rates by concentrating on a number of factors, such as improving search relevance and making sure that product recommendations are aesthetically pleasing, reasonably priced, and of high service quality. In a sense, Etsy is trying to carve out a niche for its platform of high-quality products rather than a platform for cheap goods where it must compete with countless other e-commerce sites.
Revenue Growth Rates Are Stable
All this narrative points conclusively in one direction. That Etsy's prospects have staying power. Even though it's obvious, that Etsy's growth rates have now stabilized.
On the other hand, a stable business can be quite attractive, particularly at the right valuation.
ETSY Stock Valuation - Expectations Are Incredibly Low
As you can see above, in the past year, Etsy's multiple has been steadily compressing. That's not to say that its multiple can't compress any further, because it absolutely can.
But the point I've repeatedly made throughout is that its business is a lot more stable than its share price, and in particular its multiple would lead investors to believe.
And now, I've left the best for last, take a look at the graphic that follows.
What you see here is that Etsy is able to be highly cash flow producing, with its trailing twelve months free cash flows of $660 million. Typically, as followers of my work will know, I eschew companies that report on a trailing twelve months, as I believe that can mask some level of granularity. However, in the case of Etsy, investors are pricing is very approximately 11x next year's free cash flows. At this sort of free cash flow multiple a lot can be forgiven, right?
But what about the $1.2 billion of net debt the business carries on its balance sheet? Again, when a business is clearly a cash flow generative as Etsy, this provides a lot of options and flexibility. Frankly, I don't believe that its balance sheet detracts from the bull case.
If one were to point to one detraction, it could be that it would be nice if the business was able to deliver slightly better revenue growth. But again, at around 11x forward free cash flows, much can be forgiven, even if this thesis isn't watertight.
The Bottom Line
Etsy's share price, currently at the 2019 level, is a surprise considering the overall context. Despite my past bearish sentiments, I believe Etsy has made significant progress as it continues to deliver some topline growth. Notably, active buyers increased by 3%, signaling a positive trajectory for the platform.
Etsy is investing in user experience, search technology, and high-quality listings to boost conversion rates. Its focus on delivering unique, quality products rather than cheap goods sets it apart in the e-commerce landscape.
Notwithstanding its stable growth rates, Etsy, Inc.'s valuation remains low, with a strong free cash flow position and manageable debt. Overall, Etsy's prospects seem robust, making it an appealing investment opportunity.
For further details see:
Etsy: Not Your Typical Bargain Stock, Back At 2019 Levels