Analysts Craft Mixed Response To Etsy's Earnings

Etsy Inc ETSY reported second-quarter results highlighted by a beat on the EPS line but revenue of $132.4 million missed expectations of $181.1 million. Despite a revenue shortfall, management still lifted its full year revenue guidance and this received a mix reaction from Street analysts.

Q2 Review

Etsy reported gross merchandise sales (GMS) growth of 21% in the second quarter, which beat estimates of 19% due to successful marketing and product initiatives, Stifel's Scott Devitt wrote in a note. Marketplace revenue rose 47% from last year while seller services rose 16% and active buyer growth of 19% to 43 million exceeded expectations.

The report shows the business remains "strong and steady" and management's multiple initiatives to improve the platform and product enhancement should allow the healthy momentum to continue, the analyst wrote.

Etsy's mixed report also includes encouraging signs its marketing spend is seeing signs of success, Wedbush's Ygal Arounian said. In fact, GMS per active buyer rose 1.9% on a two-year stacked rate and hit the $100 milestone for the first time ever in the second quarter. Etsy's multiple initiatives in the pipeline is being overlooked, including the announcement of Etsy Ads which brings together Google PLAs on behalf of sellers.

"This is an intriguing product development in our view as it helps open up greater overall ad spend as Etsy can better utilize seller ad budgets excess capacity on Google, and as seller spend grows there, instead shift its own ad dollars to higher funnel spend," Arounian wrote in a note.

Related Link: Etsy Analysts Mostly Positive Despite Slight Q1 Revenue Miss

What's Next?

Etsy's mixed report could have some investors raising questions related to the company's ability to report future large organic beats and support its "lofty" valuation model, Morgan Stanley's Brian Nowak said. Specifically, second-quarter GMS was in-line with estimates but EBITDA was 21% lower in the quarter, and management lowered the high-end of its EBITDA guidance to reflect marketing expenses and the ongoing migration to the cloud.

"These investments are likely prudent but further extend the investment horizon for a stock trading at ~29x 2020 adj EBITDA," Nowak wrote.

Management's focus on offering free shipping options is likely to result in higher consumer satisfaction and improved volumes, Canaccord Genuity's Maria Ripps said. This should more than offset a negative impact to GMS on a per-order basis as early signs point to sellers recovering just 84% of the shipping cost through higher product prices.

One of the key pieces to Etsy's growth story is the continued growth of buyers on the platform, KeyBanc Capital Markets' Edward Yruma said. During the second quarter, active buyers grew 19% as the company proved it is an "easier place to shop" due to improved search capabilities, stronger curation and other product improvements.

"We have not seen a management team make as many (and frequent) moves as ETSY's, and we are even more confident about its long-term growth trajectory," Yruma wrote.

Ratings And Price Targets

• Stifel maintains at Hold, price target lifted from $62 to $70.
• Morgan Stanley maintains at Equal-weight, $65 price target.
• Wedbush maintains at Neutral, price target lifted from $60 to $64.
• Canaccord maintains at Buy, $85 price target.
• KeyBanc maintains at Overweight, $90 price target.

Shares of Etsy were trading lower by more than 11% late Friday at $60.33.