In my previous article about Etsy, Inc. (NASDAQ: ETSY), I described the company’s vast addressable market and its diversification into resale, which formed the central thesis of my bullish stance.In this article I will discuss some The company’s recent efforts to improve brand awareness and efficiency will also focus on the company’s recent performance and future prospects. Etsy’s recent second-quarter 2023 earnings report topped expectations, driven by growth in gross merchandise sales, revenue and adjusted EBITDA. Etsy continues to prioritize reliability by improving timely delivery, customer reviews, and purchase protection. This shift leads to increased purchase frequency and higher conversion rates. The introduction of Purchase Protection Plans has significantly reduced issue resolution times and increased customer satisfaction.Acquisitions of Reverb and Depop could strengthen Etsy’s position in the booming second-hand market Costumes and musical instruments. Etsy’s clothing resale platform Depop is attracting younger shoppers, especially Gen Z consumers. In my opinion, the company is currently undervalued, making it an attractive prospect for investors with a long-term horizon.
Second Quarter 2023 Earnings Review and Outlook
Etsy reported strong second-quarter results, with revenue of $628 million and adjusted EBITDA of $166 million, beating expectations. The improvement in active buyers was significant, driven primarily by a significant 50 basis points year-over-year decrease in monthly churn. During the earnings call, the company expressed cautious optimism about year-over-year growth in GMS from May to July. Etsy-owned platform Depop is showing signs of improvement, with positive GMS and revenue growth, especially in the US market. Despite a slight decline in U.S. domestic operations, there were some positive indicators in this earnings report. Etsy’s commitment to its product roadmap is impressive, and advances in generative AI technology have huge potential to enhance search and discovery capabilities and enable cross-category shopping across Etsy’s unique inventory. The company actively positions itself as more than just a gift shopping platform and continues to improve curation and investment in procurement protection and trust. I believe product investments, especially those leveraging Gen AI technology, have the opportunity to drive significant growth for GMS in the fourth quarter.
Efforts to improve reliability bear fruit
Etsy places a strong emphasis on enhancing reliability in multiple areas, focusing primarily on prompt delivery, customer reviews, and purchase protection. This strategic shift is critical to increasing purchase frequency and conversion rates on the platform. Etsy has made substantial progress in increasing delivery transparency, giving buyers greater clarity and confidence when purchasing.
In the second quarter of 2022, the company launched a Purchase Protection Program designed to streamline the shopping and selling process while providing a safety net for buyers and sellers on qualifying orders, covering quality or delivery-related purchases worth up to $250 question. The move reduced the time it took to resolve customer issues by 85%, and Etsy’s customer satisfaction score soared to nearly 90%. In addition, Etsy is committed to improving the return process, and now more than 30% of product listings include a clear return policy.
Focus on marketing strategies and increase brand awareness
Because Etsy isn’t always the first choice for purchases outside of special occasions, executives are increasing investment in brand marketing efforts, including TV, digital video and paid social media campaigns. While this approach may take some time to show returns, it plays a vital role in increasing the amount spent by each buyer and increasing overall brand awareness.
Etsy has expanded this strategy to other regions, resulting in a fourfold increase in gross merchandise sales in Germany compared to 2019. In the fourth quarter, the countries with the largest number of new regular customers were Germany and Australia. Additionally, a new partnership with John Legend aims to empower female sellers, potentially further increasing average order value and brand awareness. Etsy’s performance marketing spend generated approximately $2.5 billion in annualized gross merchandise sales in 2022, compared with $2.3 billion in 2021. In 2022, the company also improved the relevancy of its advertising, resulting in more than $100 million in annualized revenue.
Depop is key to attracting younger shoppers
Demand for second-hand products has grown across all age groups in recent years, but is most pronounced among younger shoppers, with 64% of Gen Z and Millennial consumers saying they prefer to search for used products before buying new ones . In 2022, 64% of Gen Z will actively look for used items before considering buying new, and 82% will consider resale value before making a purchasing decision. Depop is Etsy’s clothing resale platform, targeting Gen Z consumers, who make up 90% of its active user base. However, there is still room for growth given that there are 62 million Gen Z consumers in the US and 13 million in the UK who are willing to buy second-hand products. In 2022, Depop had 30 million registered users, up from 28 million in 2021.
Depop allows Etsy to diversify its business into second-hand clothing while attracting a younger demographic, especially Gen Z. The global online resale market is experiencing significant growth, providing Etsy with the opportunity to expand in the e-commerce space. Depop’s current adoption rate (the fees it charges third-party sellers) is lower than Etsy’s, but that could increase through integration with Etsy’s payment and advertising features. In 2022, Depop’s total merchandise sales soared 88% to $552 million. While Depop may expand beyond clothing, it will likely remain its primary focus as it continues to cater to younger consumers.
Valuation and Financial Outlook
Etsy has huge growth potential in its overall and online addressable markets. Etsy’s GMS revenue will exceed $13 billion in 2022, and even if it goes by consensus forecasts to reach over $15 billion by 2025, it will still represent only a small portion of the overall market opportunity. This suggests Etsy has plenty of room to pursue a decade of strong growth in the high single digits to low double digits.
I expect Etsy’s EBITDA margins will likely stay below its 30% target through 2023 as it makes more aggressive marketing and product investments, which I believe are needed to drive long-term growth. In 2020-21, EBITDA margin growth accelerated to over 30%, driven by pandemic-driven digital demand. Returning to this level may take time and require modest spending. I expect margins to return to over 30% by 2027. Marketing is Etsy’s largest expense, accounting for 25-30% of sales, but off-site advertising can partially offset some of the cost, as incremental revenue helps recoup about 35% of the company’s performance marketing spend.
My positive view on EBAY is based on its relatively low P/E ratio and solid fundamentals, despite slowing growth. This is especially noteworthy compared to other small e-commerce companies that are currently operating at a loss. The stock has been range-bound since late February. I admit that this multiple is well below recent historical multiples of over 20x forward EBITDA. I believe the stock is transitioning from a strong growth phase to a more mature phase and expect the P/E ratio to adjust accordingly. Therefore, I maintain a Buy rating on the stock.
Judging from recent comments from e-commerce retailers, U.S. consumers may be cutting back on non-essential spending amid growing concerns about inflation and shrinking savings. Consumers are also likely to shift to more affordable options, which could lead to excess inventory at retail and prompt further price cuts. ThredUp observed that the number of higher-income shoppers using its platform increased 700 basis points in the first quarter as consumers sought more affordable alternatives. Companies such as Amazon.com, Inc. (AMZN), Etsy and Revolve are also noticing consumers opting for lower-cost products and focusing more on value for money.
In addition, Etsy’s stock price has underperformed this year, down 43%, while QQQ and FDN have performed strongly respectively. Investors have been concerned about Etsy’s gross merchandise volume and its ability to attract new customers. Decreased efficiency in acquiring new customers poses a risk to the company’s growth, which could impact future share prices.
Etsy has a huge customer base, with approximately 90 million active buyers on its platform. Etsy stands out with its larger customer base, higher number of sellers, and larger total merchandise sales compared to other specialty marketplaces within the vertical. The company places a strong emphasis on improving reliability through improvements in areas such as on-time delivery, customer reviews, and purchase protection. These efforts increase purchase frequency and improve conversion rates. The introduction of the Purchase Protection Plan has played an important role in reducing the time required to resolve customer issues and increasing overall customer satisfaction. In my opinion, the company is currently historically undervalued, making it an attractive prospect for investors with a long-term horizon.