Nearly every metric for ETSY got worse this quarter outside of the EBITDA margin trend. The headline was about what we thought, a sizeable beat, guidance generally in-line with where the street was. Revenue trends were worse than we expected and profits were better with lower than expected marketing spend being a big portion of the EBITDA beat along with the revenue upside. Etsy Marketplace GMS slowed to 11% growth vs 14% last quarter with guidance implying another slowdown to +HSD%, despite management saying October was off to a strong start. Halloween was likely much better YY for ETSY, so a strong October makes sense to us. Masks were less of a contribution than we thought they might be for the Q at “under 2%” of GMS, and that sales volume was like concentrated in August. The customer trends were a bit different than we modeled, the main difference being we expected more reengaged buyers and less churn (these could be the same buyers) as we expected a Covid resurgence into BTS season and mask demand to bring back more customers. Churn was 11.2mm vs our expected 8mm. New customers grew slightly better than we expected at 7mm vs our 6mm, that is reasonably positive given the company pulled back on marketing, but it was another sequential decline and is far below the rates seen during 2020. Habitual buyers still aren’t really growing, stuck at 7.9mm to 8mm for 3 straight quarters.
Total marketplace revenue slowed 330bps to +15.8% on an easier compare with about 6 pts of growth coming from new acquisitions. Seller Services slowed 1300bps also on an easier compare. The company is pointing to spend per active customer being up 20% yy (on LTM basis), but that is also slowing. Management mentions “frequency” a lot on the call for a company that doesn’t provide regular repeat/frequency metrics. We like to look at a quarterly number as opposed to LTM on GMS/average active customer count, and that metric was down 21% YY, which is better than last quarter, but slowing 1100bps when compared to 2019. The rate of change is undeniable, and on growth companies, multiples generally track rate of change. We expect churn to accelerate and new customer growth to slow, barring dilutive marketing spend. The company pulled forward several years of customer growth during the pandemic. At the same time the company has benefitted from the wallet share shift to online. Analyzing the historic cohorts, the churn trend are pretty consistent. ETSY is now going experience several years of churn in a compressed period at the same time we’re seeing a shift in consumer spending back to services and in person shopping.
The stock is just a bit off its highs, and the multiple we like to compare to other ecommerce players (EV/Gross Profit) has pushed up to new highs at 18x. It’s the most expensive by far on both an absolute and growth adjusted bases. With the trends we see in the fundamentals, the valuation gap is not sustainable, and we see downside of nearly 50% to $120.
For a replay of our September Black Book walking through the ETSY short thesis: CLICK HERE
