Etsy Earnings: Macroeconomic Pressure Weighs, but Positive Trends Emerge

Etsy Stock at a Glance

• Fair Value Estimate: $162.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Wide

Etsy Earnings Update

Etsy ETSY reported tough quarterly results, and we expect to trim our $162 fair value estimate by a high-single-digit percentage as we contemplate near-term margin deleverage. Our reaction is directionally consistent with the market, which sent shares swooning 6% in aftermarket trading as the firm released lukewarm guidance (0.7% gross merchandise volume growth at the midpoint and decelerating sales growth on a linked-quarter basis).

Nevertheless, we remain ready buyers of the name, and we identify continued growth in spending among new buyers on the platform, improvements in the firm’s curation efforts, and the rollout of a pricing tool as important developments for long-term investors and underappreciated growth levers. Shares trade at about a 40% discount to our intrinsic valuation and continue to look attractive for long-term investors. Driving our valuation change, slowing near-term sales will likely result in slower margin recapture, leading us to trim our 2023 and 2024 operating margin estimates to 12.4% and 14.6%, respectively, from 14.2% and 16.4%.

The artisanal marketplace has struggled to lap its commanding performance during the throes of COVID-19, but it was encouraging to see an uptick in active buyers (2.5% annual growth) and stabilization in Etsy’s critical habitual buyer cohort (down 1.4% on a linked-quarter basis at 7.1 million). By our estimates, new buyers continue to increase their first-year spending on the platform (calculated with a quarter lag), which at least partially underpins our forecast for mid-single-digit (5.7%) annual growth in spending per active buyer over the next five years.

We foresee Etsy returning to above-market rates of growth as macroeconomic pressures ease and believe that machine learning efforts to improve curation and pricing tools (which could help sellers better pass along inflation) should provide medium-term growth levers.