A decent quarter for ETSY, but not good enough for us to change our short positioning given the direction of the business and relative multiple. 3Q beat, which we thought would be likely given ecommerce trends in the Q were decent, and Etsy indicators weren’t bearish. The ‘surprise’ for us is the company guiding relatively inline for 4Q . We thought the company might temper expectations more given the challenging 4Q setup, though guidance does imply a real slowdown in the business, despite the company talking to October improving slightly on the 3 year stack. ETSY GMS was flat in the Q with buyers up slightly and spend per buyer down slightly. The marketplace churned off another 11.2mm customers, while adding/re-engaging 11.4mm. ETSY ramped marketing spend this Q to drive the customer engagement with S&M spend up 12% yy vs down 2% last Q. Sellers down slightly Q/Q and down 1% YY. Perhaps the most bearish data point was that habitual buyers continue to decline, losing 200k this Q down to 7.6mm. The long term bull case is turning Etsy into a (or the) starting destination for core customers, driving wallet share, and then growing that core user base. Yet this Q the core user base is down, so Etsy is not retaining even its best customers, and spending per customer did not grow while guidance suggests further risk on those metrics. The company also took a $1bn impairment charge on its acquisitions of Elo7 and Depop goodwill, just a year after the deals were done. A big hit, as those businesses have not been performing and valuations have changed in the marketplace.
As we looks to 4Q, the guidance implies that GMS slows from flat to down HSD at the midpoint, and we think there is risk to the company trending toward the low end of the guide. Holiday has started early which is a risk as ETSY won share last year when competitor retailers were low on inventory. Now product availability is high, too high in many categories driving increased promotional intensity when last year there was none. Etsy sellers have trouble adjusting price quickly enough. Management noted some sellers are getting more promotional, and that Etsy actually funds a small portion of promotions. Etsy will continue to have churn risk, while winning transactions will be harder for sellers given the year over year competitive dynamics. Growth will become more expensive. The CFO also reminded people that the compare in 1Q is challenging given the omicron spike, and that’s around the same time the consumer will be fully tapped as it relates to discretionary spend. So GMS isn’t growing and is slowing, revs up only around the seller fee increase yet that goes away within 6 months, EBITDA is down YY this Q and most likely next Q too despite higher YY share base comp being added back, yet the stock is carrying a high teens EBITDA multiple like its growing rapidly. This remains the most expensive name on EV/gross profit in the ecom space both absolute and on a growth adjusted basis. Given the growth trends we think this should be closer to trough multiples, but its current far from trough, and we think there is risk to forward estimates as well. We’d fade the aftermarket rally on somewhat better than expected results. As investors digest the business trends we think the start to value the company lower on the weak 6 to 12 month growth profile. We’d put a fair price range on ETSY today at around $50 to $60. Best Idea Short.
