Etsy's Recent Earnings Suggests A Turnaround

| About: Etsy, Inc. (ETSY)


Etsy reported strong second quarter earnings and the management also guided to a very strong outlook.

Growth in both active buyers and sellers highlights the attractiveness of Etsy’s site.

I think Etsy is in a good spot given its e-commerce exposure and niche product focus.

Etsy (NASDAQ:ETSY) is a peer-to-peer e-commerce website that focuses on handmade and vintage items. The company became public in the middle of last year but the stock has not done so well. Since its IPO, it lost close to half of its value and still has no earnings. However, revenue has been growing quite strong. Similar to my thesis on Shopify, I think Etsy could position itself to ride the e-commerce growth in the US and the fact that it specializes on unique items makes it an interesting acquisition target for other brands or e-commerce sites that are looking to expand their scope.

Etsy's second quarter results did not disappoint at all. Gross merchandise sales, or GMS, grew 22.6% from last year to $669.7 million and this resulted in total revenue of $85.34 million, an increase of 39% from the prior year. The higher net revenue growth than the gross revenue growth means that commission was higher this quarter and this is a good thing because it suggests that there are not a lot of discounting involved in the quarter. The net sales number was actually higher than the Bloomberg estimate of $80.6 million.

Etsy generates two revenue sources, one from the seller and one from the buyer. The marketplace revenue is driven by sales while seller services revenue is derived from a $0.20 listing fee, a 3.5% transaction fee and a 3%+$0.25 payment processing fee. During the quarter, seller services revenue grew 58% to $47.06 million while marketplace revenue grew 22.8% from the prior year. So as you can see, a majority of the growth came from seller services, and this suggests that more and more sellers are listing their items on Etsy for e-commerce management as business owners look for reliable e-commerce platforms. I also recently observed a similar trend in Shopify, which almost doubled the number of business owners using its software.

Equally important was the number of active buyers and sellers on Etsy. At the end of the quarter, there were 1.65 million active sellers, a growth of 11.5%, but active buyers grew 20%. It was also interesting to see how mobile visits now accounts for 64% of the total compared with 60% before that many buyers are transacting on mobile as indicated by the 4% growth in mobile sales to 47%.

The results were very good but I think there are still more to come and that the decline in the stock price since the IPO was overdone. One thing worthy of flagging is that Etsy has launched several products that could attract buyers to the site and search for products that may interest them. The company has updated its mobile and desktop experience and management believes that this has been driving good buyer growth rate as suggested by the growth that I highlighted earlier.

For example, Etsy upgraded its search function so that buyers could conveniently look for 35 million items listed on the site and this resulted in more than half of the buyers who made one purchase last year to come back for additional purchase. This is quite impressive and I believe that this will be an important area where Etsy could achieve some torque on buyer growth.

Also, international is another area that the company is focusing on. While international sales is not growing as fast, accounting for 30.7% of total sales compared with 30.2% last year, there are still opportunities where Etsy can take full advantage of its machine translation that helps localize the Etsy experience and allows buyers and sellers to transact more conveniently even under different languages.

Having lived in three countries and speaking three different languages, I can say that communication is crucial when it comes to e-commerce and Etsy is making the right step to address this common and yet simple issue. Management gave us some ideas on this technology's potential and it was promising to hear that machine translating increased the items available to non-English speakers and as Etsy continues to foster local communities in Australia, Canada, France, Germany and the UK, I think the current target of 50% international GMS is achievable.

Etsy's past year performance may not be great but the company's niche on vintage and handmade stuff could be valuable to big brands. But the bigger picture is that Etsy is in the e-commerce theme, and I believe that as more buyers use the internet to look for deals, then Etsy is in a very good spot to benefit from this trend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.