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This Best Idea Short has worked for us so far, down ~40% since we made the call. But we continue to see growth risk in the coming quarters around both customer and GMS churn, which we think is good for another 30%+ downside. Revenue and profit trends are slowing, yet the stock still carries a significant multiple premium to other ecommerce players which we think have better 2022 growth trajectories. The CEO continues to sell stock, $12.5mm around $158/sh this week, even after cashing in about $45mm worth in 4Q21 alone at an average price of $240. Management sounds bullish on the call highlighting higher spending, retention, and repeat purchasing on the Etsy marketplace, yet in July it did two expensive acquisitions, and just announced an increase in the transaction fee on its sellers. These actions reek of concern for core growth in 2022. We see another 30%+ downside risk over the next few quarters as growth stagnates.
Below is our note from after the 4Q21 earnings print.
ETSY | Good, But Plenty of Holes to Poke
Takeaway: This short has worked great for us, and we’d be shorting more in today’s pop on the numbers.
Credit where credit is due, in an ugly ecommerce environment with a lot of misses or squirrely prints, ETSY delivered a strong 4Q relative to expectations. Top line and EBITDA beat with a very slight GMS slowdown for core Etsy to +11.8%, improving on a vs 2019 basis over last Q. Breaking down the beat vs our expectation, Etsy marketplace active customers came in ahead of our estimate by a few million. Oddly enough churn was actually 3mm worse than we had modeled, but new and reengaged were 6.8mm better. The new customer number is particularly surprising/impressive given how many unique customers the company has already churned through. We think churn remains elevated (the historical math suggests as much and validated by churn this Q), and we don’t think new and re-engaged can keep up this rate. Spending per customer was also better than we expected, though quarterly GMS per active buyer was still down 7% YY. Gross margins came in well below what we expected down 470bps YY, so gross profit was just slightly ahead of our model, but the company made that up with lower sales & marketing and lower G&A. Perhaps the most "bullish" data point is the company taking up its transaction fee increase from 5% to 6.5% starting April 11th. That’s bullish for the P&L and margin trajectory, but it's coming from a defensive low growth position and is bad for the virtuous cycle assortment narrative of seller and buyer growth and the net competitive positioning. Management expects to invest much of that upside back into marketing. Sellers are barely growing, with this fee hike they are likely to go negative over the coming quarters. ETSY is one of the better performers in ecommerce this Q, but still gross profit is slowing, the company just guided down 1Q revenue substantially, churn is high and seemingly getting worse. We’re not ready to think this stock deserves a super-premium multiple (EV/Gross Profit) in the ecommerce space.
One issue we have is that there is a lot of fluff in the conference call and presentation around repeat activity, spend per customer, retention. Yet the bullishness of the commentary doesn’t match up with the number trends. Habitual buyers were up only 100k from last Q, that’s 100k from about a pool of 80mm that could convert. It’s won a lot of share during the pandemic for sure. But the direction of the fundamentals is still net bearish in our view.
We’re making some slight upward revisions to our model around on customer count and spend per customer given the results this Q. We’re also adjusting take rate and gross margin for the fee increase, while tempering the underlying gross margin and cutting some out of SG&A lines.
We went short ETSY in September calling for around 50% downside risk to $120. The short had been working, opening around $110 Thursday. Market sentiment changed dramatically on this name from one print to the next. The multiple rightly compressed in our opinion with clear fundamental rate of change deterioration. The stock corrected ~60% from its November highs so a relief rally on a beat and “better than most print” makes sense. We still however think this is carrying too high a multiple both on an absolute and relative basis for where we see revenue and margins trending to in the coming quarters. ETSY is a great business and a good company, but we’re not yet where we think it’s a good stock. We’ll see where the price settles out and where expectations correct to after the 1Q guide down, but for now we remain short.
