A good headline for ETSY vs expectations with revenue ahead by 7% and adjusted EBITDA ahead by 9%. Revenue accelerated slightly to +12.6% from +11.7% last Q and gross margin improved, both aided by the increased seller fee YY. That’s about where the good news ends. Consolidated GMS slowed from +0.7% to -0.7% in constant currency. Etsy Marketplace Buyers were up slightly Q/Q, but still down year over year and habitual buyers were down again Q/Q by 200k, down 9% YY, so Etsy continues to lose core customers. Though the company added 9.2mm new customers, and re-engaged 8.6mm, the implied churn is a new high of 16.7mm in the Q. With a step up in marketing spend, customer acquisition cost was up 13% yy. Despite the seller fee increase, EBIT was down 2% YY and the headline adjusted EBITDA which appears up 4% YY includes an increase in share based comp (which gets added back) of 14.5mm. So with revenue up 13%, we’d argue real EBITDA was down 4% this Q, and ultimately down 16% for the year. Share based comp is 3.5x where it was in 2020, and now makes up 32% of Adj EBITDA. The company is buying back some stock, but we’d argue it should wait for a better price. Seller services performed well, with ad dollars beating expectations up 20% YY. Taking more from sellers isn’t how this model needs to grow, it needs more buyers and perhaps more importantly more spend per buyer, which has not been the case.
The company guided to another slowdown in GMS and EBITDA margin slightly below the street (likely with higher SBC). Maybe the company is being conservative, but we think 1H23 is where the consumer will really start tightening down on discretionary spend. The CFO noted that trends have seen volatility in demand in recent weeks and outside data has indicated a shift in spending away from discretionary goods and more towards services and food/necessities. ETSY GMS has held up a bit better than we expected, but the business trends are still not good. Slowing GMS, new highs in customer churn, EBIT in decline, and the company will be lapping the seller fee increase within a couple of months, meaning growth is likely to slow more. We don’t see why this business should carry such a premium multiple. ETSY trading at 24x EV/EBITDA and 9x EV/Gross Profit. AMZN is trading at 12.4x EBITDA and 4.3x Gross Profit. Meanwhile at over 50x the size, AMZN will likely be growing revenue and EBITDA faster than ETSY by mid-year. With slowing trends and no growth, ETSY remains a Best Idea Short. Fair value around $60 to $80.
