This print was a thesis validator for our short call. The stock has already had a significant drop from around $300 in the fall to the low $90s this week, but this print solidifies the growth pressure on ETSY. Gross profit slowed again on a 1 and 2 year basis ending in a slight decline year over year, and that’s including the inorganic contribution of the 2 acquisitions closed last summer. Revenue was up just 5%, as customer metrics were very much as we expected ending in line with our model at 89.1mm Etsy customers. New adds were what we expected at 7mm, re-engages customers were slightly ahead so churn once again was worse than we thought with ETSY losing 13mm customers this Q. Every buyer type was down Q/Q, total active, repeat buyers, and even habitual buyers are now shrinking after being flattish for the last 4 quarters. So even the core is in decline. That’s not a supportive of the company narrative around so much incremental growth and repeat purchase performance. Sellers were up slightly this Q, which was a positive given inflation pressures on sellers and buyers declining, though we are curious who the actual seller and maker of the handmade Amazing Square Ottoman Pouffe is (image below). EBITDA beat, but it came from lower than expected marketing again. There is reinvestment on other lines of operating expense while topline metrics are slowing, which has been core to our thesis all along. The company talks about protecting return on marketing dollars, but the lack of customer growth in the context of marketing coming in below expectations perhaps suggests there just isn’t much profitable growth out there for ETSY, at least not right now. GMS from the acquired businesses also keeps underperforming our expectations and management isn’t sharing much detail around the growth rates of those businesses.
The company addressed the publicized seller “strike”. As we thought might be the case, the actual quantity and impact looks to have been very small, though the company’s narrative around it is still somewhat troubling to us and raises lots of questions. Here is how it was addressed by the CFO.
“When the fee change went into effect, we saw less than 1% of sellers go into temporary vacation mode. Active listings dipped less than 1% during that week and returned to the prior level when the week was over. Based on past experience and significant research leading up to the change, this was all within our expectations. The overall impact to our GMS for the week was not material and seller churn remains at normal levels quarter-to-date. At quarter end, we had well in excess of 95 million listings on etsy.com. And as you know, we have no shortage of items for sale. And while no one likes fee raises, we actually heard from thousands of sellers supporting our efforts to invest in them. We really value input from our sellers and are confident in our investment plans. We trust that sellers will judge us by our outcomes when they see the value we are able to provide.”
The company is talking about reinvesting to bring more buyers onto the platform and value to sellers, and that the fee increase is necessary to help fund that. Yet the company’s margins are still well above pre-covid, it’s been talking about reinvesting for 3 or 4 quarters now, and marketing dollars for the last couple Qs are coming in under consensus. So why exactly does it need to do a fee increase to execute the marketing re-investment needed to drive more buyers? And if the company cares about sellers so much, why not front the investment, bring in the buyers, drive Etsy GMS up and then take up the fee after the sales improve? And if a fee increase is needed to reinvest in the core for your sellers, why did ETSY spend $1.7bn on expensive non-core acquisitions that don’t appear to be performing that well?
We think the more logical explanation here is ETSY is churning off a ton of customers, marketing can’t profitably find enough new ones, and a fee increase is an easy route to get a little top line growth onto the P&L. Afterall it still has some room on fee vs competitor platforms. In the end, we think sellers have a reason to be upset. Hopefully for ETSY the sellers just move on. It’s dangerous to walk the line of angering sellers and potentially customers here.
The company talked about weakening trends month to month to month since February. With churn and spend per customer coming in a bit worse than our expectation we are taking down our revenue numbers and lowering EBITDA corresponding to the revenue drop. For 2022 that’s $2.55bn in revenue and $675mm in EBITDA. The stock is not as expensive as it was, though the entire ecommerce industry multiple has also compressed significantly. We’ll see where consensus resets to and where the stock shakes out in the coming days, but for now ETSY remains on the Best Idea Short List.
