ETSY. Real Deal Or Just A Reflection?

Graphic, cover, ETSy Real DealGraphic, STOCKjAW banne, Quality View

For

nearly two years now ETSY’s been migrating it’s operations to the Google Cloud. The artisan-driven hand-crafted goods marketplace is melding old and new to stoke an even larger fire. Big Data-fueled insight and analytics are at the wheel for this Brooklyn-based singularity.

 

Learning from Amazon is key. Think free shipping standard. “Price it in. Helping buyers find items, building trust in our brand, and the confidence to buy,” says CEO Josh Silverman. The “find items” element of that brew is labeled within the company as “Search and Discovery.”  Well, of course.

 

 We’re doing that as well, in an attempt to understand why shareholders have abandoned ETSY like a burning ship, while it’s sales are blowing full. STOCKjAW looks inside “ETSY. Real Deal or Just a Reflection?”

 

beach, Panama
The hectic push of a modern mass-produced world makes hand-made feel exotic. It is. But how well is it working in the world of ETSY?

 It

walks and CEO Josh Silverman talks like it’s the real deal.  But is ETSY a good stock?  Still?  Bringing 2.3 million sellers together with 43 million buyers is real.  What are you when you’re still standing, even after Amazon takes a run at you?  That’s right–you’re real.  Hum.  What do you suspect Bezos said when AMZN’s effort failed to overwhelm?

 

 

But what do you call a play that’s up 6.64% over six months and 5.08% of that’s been over the last five days?  You call it flat as a pancake overall.  And when it’s up 19.15% YTD and down 13.53 over twenty days?  You call it Fa King annoying.  You’ve got a rollercoaster bag of sick or a plastic shopping bag in a swirling wind.

 

How do you respond to a 5-year annualized revenue growth of 37%?  And cash flow growth of 56.3%?  You say “Thank you–what’s next?”  Do you want to own it?  Perhaps the question again and always comes down to EPS growth.  Isn’t 20% EPS growth good?  Why is ESTY’s entire clutch of numbers not more loved right now by investors? Over the past four quarters ETSY’s beaten consensus like a Fa King Brexit goat; 110% in November, 56% in February, more in May at 69%, and 17.4% for Q2 on August 1st yo.  What the hell do these people want?  A guarantee? 

 

 

We notice that ETSY’s grown sales by 41.3% over the past year.  Match that up to the market’s weak-ass 7.3%.  That’s greater by a factor of 5.66x.  Q2 represented a 17.4% beat.  So where’s the love?

 

Etsy Inc.(NASDAQ:ETSY) 8-11-19

Chart, ETSY, 8-11-19
Glory and grief. ETSY gaps in both directions in a six month period. Shareholder expectation is a weight. We suspect the slight decrease in guidance for a single data point was the trigger for August. Yet, the real damage seems macro-driven. High multiple shares take the biggest beatings when open-ended uncertainty appears. That’s where we are(SJChart.)

ETSY’s

a marketplace creator.  Their current efforts are two-fold; marketing the site to buyers, and empowering sellers.  Increasingly they’re reaching out to buyers and potential buyers through television and social media.  They provide sellers with research-based insights and fee-based packaged tools and services, now including better opportunities to advertise.  Advertising for sellers and free shipping are two of the company’s newest efforts to drive traffic and sales.

 

ETSY is a market-maker.  The company creates revenue as a percentage of the sales made by it’s sellers.  It also collects fees for the services and tools it creates and provides to those sellers.  ETSY just upped what they refer to as their “take rate.”  It rose from 16.5 up to 17.1.

 

 

Q2 also threw in year-over-year revenue growth of 37% and 43% growth in EBITDA.  “Net income?” you ask?  Well of course.  That too.  They had that at a modest growth rate of  439.7%.  And the market dumped shares like radioactive beach sand yo.  Hum…  

 

 

woman, T-shirt
Style appeals and unique sells. That’s ETSY. Cottage and hand-made are big sells for many, while mass-produced in out. The age of the artisan is back. Now we have standard “Free Shipping” on orders over $35. Hum. Who standardized that? Amazon, of course.  But most AMZN 3rd party sellers do not offer free shipping,.  But AMZN does offer them “Fulfillment by Amazon.'”

The

Q2 news came straight out of Brooklyn.  The quarter ended on June 30th. “In the second quarter we continued our momentum, posting 37% revenue growth and 43% growth in EBITDA versus prior year.”–Rachel Glaser, CFO Etsy, Inc.  Marketing expenses ate up 25.4% of revenue.  That’s up from 20.9% sequentially.  Wow.  But Josh is good with that. 

 

ETSY, on Mad
ETSY CEO Josh Silverman clarifies the second quarter with Jim Cramer. “Making free shipping standard on ETSY.”  On the front steps of the NYSE.

ETSY

posted net Q2 income of 18.2 million, translating into diluted EPS of $0.14, a penny above the Capital IQ estimate.  They are normally above the consensus estimate. That modest-looking net income of 18.2 million lines up against last year’s $3.32 million.  The math means a year-over-year net income growth rate of 439.7%.

 

 

Investor patience is greater when times are more calm.  Some credit is due when a company grows net income by 439%.  Earnings growth is what we pay for.

 

Non-GAAP Adjusted EBITDA was 39.7m. up 43.4% year-over-year.  The total represents a 21.9% Non-GAAP EBITDA margin, and a 100 basis point growth year-over-year.  

 

 

ETSY, mad, carbon
ETSY is partnering with to create carbon offsets. ETSY’s goal is to completely off-set its’ shipping carbon footprint.  Summer Mad Money outside on Wall Street.

The

company racked a 67.6% gross margin, rising 190 bps.(1.9%.)   Sequentially that’s a drop from Q1’s 68.9%.  ” The contraction in gross margin was primarily impacted by our on-going migration to the cloud, which we believe is a tailwind to our product development
efforts.”

 

What about the cost to run the business?  Operating expenses for Q2 totaled 104.6 million, up 41.0%.  “The increase in operating expenses was driven primarily by marketing expense, specifically the investment in our TV campaign, and an increase in headcount related to product development.”

Graphic, banner, On The Call

“Dynamic

retargeting?”  That’s marketing talk, and also half of what this company’s about.  ETSY’s engaged in selling to the buyer while educating and tooling-up sellers.  You’ll hear about their key metric GMS, or gross merchandise sales.  That’s the key metric.  You’ll also hear “Active Buyers” and “AOV”  or average order value.  In totality it’s simple really.  The company’s empowering sellers while pumping the site’s profile through advertising.  The rest is details.

 

 And dynamic retargeting?  That simply means following a site visitor around the web with your adverts.  Ask Nordstrom.  They’ll follow you everywhere until you reset to an earlier time.  Visit ETSY and you will be “dynamically retargeted” on Facebook.  On the call you will hear CEO Josh Silverman and CFO Rachel Glaser referring to the funnel.  That’s a marketing model featuring television and digital video at the wider top and social media and other means below.

 

Like FB’s Active Users, ETSY’s second key metric is “Active Buyers.”  They have 43 million buyers, 19.3% being “Active.”   Central to that metric is the “Habitual Buyers,” those cranking up $200 or more total, and six or more buys, within a 12 month period.  Guess what?  They also track “Active Sellers,” or which 17.7% are considered “Active.”

 

 

ETSY, Laser Etched decanters
Custom laser etched decanters. $129.00. Nice. Order it your way.

Responding

to analyst’s questions concerning martins CEO Silverman says “Bringing down our margins a little bit, I think is very good news.  We have a lot of confidence in our marketing.  In TV, we’re not being that timid, for people who have been doing it for only about a year.  We can invest even more.”  They call this “upper funnel marketing.  “I think we’re more on the aggressive side of using marketing to drive growth.  Our ‘Belongings’ TV campaign is working.  TV spend can make our other efforts work harder.”

 

Until this month, fewer than 30% of ETSY’s sellers were offered free shipping.  For the better part of two years Silverman has been working with sellers on the need to offer free shipping.  “It works to price shipping in.  That creates higher order values, conversion rates, and buy frequency.”  He shifts gears and comments that “we’re working on other friction points as well, like standardizing returns…and offering sellers ‘Promoted Listings,’ an on-site feature which are growing quarter over quarter.”

 

 

ETSY, painting
ETSY’s a natural fit for art work of every kind. Only $695.00.

“Google

Shopping PLAs” are ads that direct traffic from Google straight to sellers shops.  Now ETSY offers sellers both company-based ads called “ETSY Ads” and Google’s ad options together, on one platform all handled by the company.  Sellers simply set a budget through ETSY’s new “Smart pricing tool,” and receive a combined advertising campaign through both the company and Google’s placements.  This avoids complication, and confusion.  “Sellers want more ads now than ETSY can offer.”

 

 

“State taxes are coming online soon and could affect our revenue.  It does affect GMS and our conversion(visits turned to purchases).  California is coming on-line soon.”–CEO Silverman

 

 

2019 Financial Guidance.  The company increased “GMS” or general merchandise sales growth from 18-21% up to 20- 22%.  Revenue upped from 30-32% to 32-34%.  But Adjusted EBITDA Margin dropped; 23-25% down to 22-24%.  This is no doubt behind the ugly sell-off all shareholders suffered.

 

 

ETSY, mirror
Would you expect to find this in “hand-made?” Art Deco mirror $2098.00. Oops, is this Restoration Hardware?

ETSY’S

grown EPS by 98.5% over the past year, vs. 11.6% for the benchmark.  That’s massive out-performance, but at a price.  The company’s single year forecast EPS however is not a crowd pleaser at 20%.  The S&P’s is at 17%/  That’s a 17.6% difference in ETSY’s favor.  But again, even the market’s not cheap now, at approximately a 17 P/E.  The return on equity(ROE) for ETSY is a beat-down at 28.3 to the benchmark’s 16.  That’s a massive 76.8% difference.  Yet even following ETSY’s post Q2 drop, shares are  still very expensive, thus hyper-vulnerable to wider market drops, like Monday’s.

 

 

We see no lifting love for ETSY in the near term, even with the strong consumer.  The risk/reward is wrong for the uncertainty of a trade war and the  unfolding reality of slowing earnings for all.  ETSY’ s a sell.  We’re now under water and will wait, perhaps even for their best quarter, and that Q4 retailer bounce.  By all accounts X-Mas should still be good in America.     

 

 

Any chink in a stocks fundamental armor now reads like death to the jittery.  We almost don’t blame them.  Out-performance always creates vulnerabilities.  Crazy-fast also often means flammable.  Think funny cars.  ETSY is growing nicely and has zero China exposure.  Their Amazon-tested as well.  Yet it seems all those aren’t enough now.  But somehow Beyond Meat is.  Wait until that burns to a crisp upon reentering Earth’s atmosphere.  

 

 

ETSY

Investor Relations

Company Results

https://investors.etsy.com/financials/quarterly-results/default.aspx

 

The Investing Journey

graphic, flying s.

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