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Etsy Earnings: Attractive Valuation, but Marketplace’s Return to Growth Hangs on Macroenvironment

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Our confidence on wide-moat Etsy’s ETSY long-term prospects remains largely unchanged despite mixed first-quarter earnings, but the firm’s sensitivity to a very discretionary category mix—home decor, apparel, jewelry, gifts, toys and games, and crafts—suggests that an inflection in gross merchandise sales growth is likely to be macro-driven rather than company-specific. More concretely, we expect to lower our five-year sales and operating income cumulative annual growth rates to 16% and 27% from 18% and 30%, respectively, with pressure on consumer discretionary income looking set to extend a demand recovery well into 2024—consistent with Morningstar’s department forecast for just 1.4% growth in real U.S. consumption spending in that year. On balance, we anticipate lowering our $167 fair value estimate by a low-single-digit percentage, leaving shares trading at a substantial discount to our intrinsic valuation.

Quarterly results were mixed, in our view, with $641 million in sales healthily edging our $605 million forecast, but with $0.53 in diluted EPS missing our $0.60 estimate, largely due to investments in product development (up 30%). Second-quarter guidance arrived a bit ahead of our initial prognosis on sales and GMS, but 26% adjusted EBITDA guidance fell quite a bit behind our 27.6% expectation as the firm invests more heavily in marketing behind its struggling apparel resale subsidiary, Depop, and laps one-time tax benefits. On balance, we expect modestly improving GMS growth over the balance of the year but less margin recapture than initially contemplated, suggesting that the firm doesn’t return to 20% operating margins until 2026, a year later than we’d previously expected.

Finally, with gross merchandise value falling 3% from the year-ago period, we sympathize with investor frustration at the firm’s protracted turnaround but maintain our view that the best is yet to come for the craft marketplace.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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