Etsy Earnings: Revenue and Earnings Outperformance Don’t Appease the Market; Shares Very Cheap

We believe wide-moat Etsy ETSY offers compelling value for investors despite a brutal 2023, which has seen its share price fall by a striking 45%. While we’re sympathetic to the market’s concerns regarding the craft marketplace’s growth prospects and potential operating leverage, we continue to view its reaction as myopic. We continue to foresee a route to double-digit gross merchandise sales, or GMS, growth and the margin leverage that begets as soon as 2025. With the firm’s $3.04 billion in GMS, $636 million in revenue, and $0.64 in diluted EPS all topping our quarterly estimates, we expect little change to our $145 intrinsic valuation despite worse-than-expected fourth-quarter guidance (low-single-digit GMS decline and a 2-percentage-point sequential fall in adjusted EBITDA margin at the midpoint).

Etsy is strikingly efficient for a company its size, generating $1.3 million in revenue per headcount at its core marketplace and averaging $39, $49, and $14 in average incremental GMS per dollar of research and development, general and administrative, and marketing spending, respectively, between 2018 and 2022. It continues to defend category market share in its largest online verticals despite a clear customer migration toward discounters and nondiscretionary items, and has seen a clear, marked uptick in penetration with male and international buyers (up 9% and 7%, respectively) that should lay the groundwork for durable growth inflection once macroeconomic pressures ease. We continue to foresee a route to nearly $250 in GMS per buyer by 2032, and expect balanced growth between customer acquisition and spending per buyer as the firm expands its global presence and reach among the male population.

On balance, we’re encouraged by Etsy’s prospects, and encourage investors to consider building a position in a marketplace that trades just 30% ahead of November 2019 prices despite boasting three times the revenue and six times the operating profit that it did in that period.