No change to our Best Idea Short thesis or our estimates on this ETSY print. A decent headline for ETSY vs expectations with a revenue beat of 3% and EPS of $0.53 vs the Street at $0.51. Revenue decelerated slightly to +10.6% from +12.6% last Q and gross margin was roughly flat in the Q, sequentially worse than last Q up approx. 120bps. Consolidated GMS continued to slow from -0.7% to -2.6% in constant currency, and -4.0% to -4.6% reported. Although Etsy Marketplace acquired only 7mm new buyers vs 9.1mm new buyers last quarter, Marketplace Active Buyers were up 1%, growing for the first time since 4Q21. In total, active buyers came in at 89.9mm vs the Street at 94.6mm. Not good. Adjusted EBITDA margin was down 90bps, sequentially better than last Q down 240bps. That’s one of the few positive rates of change. Stock-based compensation gets added back to calculate adjusted EBITDA and it is up on a dollar basis 39% YY, accounting for 40% of adjusted EBITDA. Last quarter it accounted for 28% of adjusted EBITDA. The company continues to buy back stock, and at a worse average price than last quarter when we said we think that management should wait for a better price. This quarter the company repurchased $148mm (1.2mm shares) average price of approx. $123/share, and last quarter it was approx. $111/share. The company should be investing more in attracting new buyers and sellers, as well as keeping old ones, rather than using cash to buy shares at arguably too high of a price. Is it egregiously high like when we made this a Best Idea Short at $280? No. But we still think ETSY will have the opportunity to buy stock lower.
At the midpoint of guidance for Q2, GMS down 2% and EBITDA margin slightly below the street (likely with higher SBC). The company gave a big range for revenue guidance in the upcoming quarter, could be flat or up 10%. That’s an uncharacteristically wide range for ETSY. Management said that trends for the quarter look good so far, with a promising set up around Mother’s Day, but it said that it could also see volatility. The reality is that the company doesn’t know its revenue numbers (we don’t fault them for it – this is retail after all. But it’s a fact). The beginning of Q2 is when Etsy laps the seller fee increase, so growth is likely to slow more starting this quarter. As we’ve been saying for multiple quarters now, 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. While EV/EBITDA multiple has dropped to 17x (vs the 24x when it reported FY22), we still think this name carries too high of a premium relative to e-comm peers. AMZN is trading at 12.8x EBITDA, meanwhile at over 50x the size, AMZN will likely be growing revenue and EBITDA faster than ETSY by mid-year. With slowing trends, no growth, and the highest EV/Gross Profit in e-comm by a country mile (7.3x) ETSY remains a Best Idea Short. Fair value around $60 to $80.
