Etsy’s revenue growth rate is a pleasure boat about to go over Niagra Falls.
Look at the table. All the cheers about its 142% revenue growth come because its revenue is being compared to that miniscule pre-Covid revenue of $228 million of the first quarter of last year.
**2019: - 169 181 198 270 818**
**2020:- 228 429 451 617 1725**
Think of it this way: what happens in next quarter when their revenue is compared against Covid-boosted Q2 2020 revenue of $429 million? Are you ready for a shock? Well, if if you compare this quarter’s revenue was compared against that $429 million, that up 142% becomes up 28%!!! …(551/429 = 1.28)
So what are they guiding to for next quarter? It’s $493 million to $536 million. That’s $514.5 million at the midpoint. It’s $36 million LESS than revenue this quarter! It’s up 20%!!! They are trying to prepare their stockholders for the awful truth:
“We currently expect Q2 2021 GMS to decelerate along with the rest of e-commerce as we lap the tremendous 2020 growth rates…”
But everyone looks at the 142% growth from this quarter and says “Oh, Etsy is doing great!”
Granted, they are sandbagging. Last quarter they guided to $524.5 at the midpoint and $536 for the top of the range for this quarter, and they beat the midpoint by $26.5 million and beat the top of the range by $15 million.
They are obviously seeing slowdown, as the middle of the range of guidance for next quarter is actually $10 million LOWER than their midpoint of guidance was for this quarter, although 2nd quarter is normally better than 1st quarter.
So, allowing for sandbagging, it’s evident that they will come in next quarter at up 25% to up 30%. That’s going to be quite a shock for stockholders who haven’t been paying attention. How will that 28% growth feel to them after cruising along at 140%???
A word to the wise,
Agreed - this is what I was trying to warn on last month, their previous earnings call had warning signs all over it…
I agree within the context of a concentrated portfolio meant to deliver maximum upside all the time.
However, I see no issues at all for LTBH. 25% growth over their “coming of age” covid quarter is nothing to scoff at, Covid rages on globally, including in the EU where Etsy has enormous room to grow, profit margin is growing sequentially.
It is just a different type of great investment. One that can be bought and very much forgotten, David Gardner style.
For me this ETSY earnings is a case of market expectations being drastically different than my internal expectations. It is first and foremost critically important to own companies that meet your own expectations / model. However, this is a clear example of how you also need to be in sync with market expectations or you can be in for a wash out in the short term. Also, this is a reminder that market expectations have basically zero correlation with analyst estimates… ETSY Q2 guide is well above analyst’s estimates. Do not use or rely on analyst estimates.
My model had ETSY doing ~10M more in Q1 and ~$10M more in Q2 than actuals and guidance (+ beat)… basically 2% off my expectations, This was largely driven by lower mask sales this Q than I expected but this is not something to ignore and I am reconsidering my small-ish position as I work to ensure my portfolio matches my true investment focus (hypergrowth SaaS). However, if this company’s execution / results / guidance are meaningfully different than what anyone was expecting I think you need to re-asses your process. This result matches everything the company said on last earnings call and how the numbers model out when considering GMS less mask sales, customer growth, etc.
ETSY is not a hypergrowth story and as a result likely means it should not be a heavy focus of this board – but performance and guidance wise, this is not anywhere close to an AYX or FLSY or countless other companies that have actually faltered and lost their thesis. This was a company whose price was over-inflated by investors who had an unrealistic thesis but the company is executing just as they have been. If the company a value or over-priced is a separate question for everyone to answer, but this is not a surprise or execution miss.
Consider this… for GMS, take Q2 GMS guidance… add +5% beat… adjust for Mask GMS Y/Y (346M Q2’20, 70M Q3’20 est) and presto they are growing GMS 30%+ Y/Y on their baseline business and that is compared to the height of COVID. Before COVID ETSY GMS growth had been right at a 20% Y/Y average for several years (adjusted for Reverb), so this is an acceleration vs pre-COVID.
Ultimately with ETSY we have a company growing ~30% Y/Y (when you take out the noise) with 30%+ Adjusted EBITDA and a EV / TTM Adj EBITDA is now <30X – average of last 12 historical quarters ETSY has been valued at ~40X. Small note, but do you all realize SBC at ETSY is only 4% of Revenue – really impressive.
Anyways, this is not a hypergrowth story – this is a 25-30% growth story putting off tons of EBITDA valued well below its historic valuation even for many quarters before the pandemic. P/S at this point is 9. This stock would basically be the poster child for the analysis and valuations used on this board several years ago before SaaS focus.
This is not a “pro” or “anti” ETSY post but wanted to share some context on how I view the results - still determining if ETSY earns a spot at the small end of my portfolio.
Another neither pro or anti Etsy post:
Unlike many growth companies discussed here, Etsy is profitable, meaning you can calculate a PE.
Lazy person’s statistics from Yahoo:
Trailing PE: 60
Forward PE: 40
Real earnings helps provide a floor for stock price. If growth continues at 20-30%,it is probably reasonably priced.
Probably good LTBH.
No longer hhhypergrowth material.
(Disclosure, I hold about a 3% position in ETSY.)
I’m not trying to defend ETSY saying anyone should not sell, and instead should hold or add, but just trying to point out that the Q2 growth could be looked at as not as bad as it seems in this message. Here are the revs and growth rates posted in Saul’s message:
Revenues (with masks)
2019 169 181 198 270
2020 228 429 451 617
2021 551 _**541**_
2020 35% 137% 128% 129%
2021 142% _**26%**_
The 541 is my estimate of the Q2 revs based on their average guide and a 5% beat. I’ll admit, that doesn’t look the best, but nobody should have been expecting the growth to remain in the triple digits beyond a year (just like ZM or any of the other big Covid beneficiaries).
To me (and as some others have pointed out), the mask sales really skewed the numbers for the last 4 quarters (kind of like the DDOG “adjustment” we’ve been modeling, but in the opposite direction) and their effect is now almost gone (per management, just 2.5% of GMS in calendar Q1 and still dropping). If we remove their effect over the past 4 quarters you have the following. They stated that mask sales were 14% of 20Q2 GMS, 11% of 20Q3, 4% of 20Q4, and 2.5% of 21Q1, and still dropping, so I estimated 2% for 20Q2. Also, I just used those same %s for the rev reduction (not sure if that is right, but I’m sure someone will correct me if it’s not ).
Revenues (without masks)
2019 169 181 198 270
2020 228 369 401 592
2021 537 _**530**_
2020 35% 104% 103% 119%
2021 136% _**44%**_
So their “core business growth” without the mask sales over the past year for Q2 may be more like 44% instead of what will show up as maybe 26%. I’m not making any guesses beyond that, but 44% growth isn’t too shabby, especially for a company that also has earnings.
It’s an interesting point that the core non-mask business is growing at 44% but the reality is that you are investing in the total Etsy not the non-mask Etsy and so you are back to the 24% growth or whatever it is.
This is the exact reason why I don’t invest in Pharmaceuticals unless it is a young and emerging Biopharma. Effectively almost ALL the growth revenues is just getting offset by the drag of the decline in established/mature portfolio revenues going off patent so you are left with a pretty mediocre average growth rate for the investible company as a whole.
For what it’s worth it got me worried about the same concern over what to expect with Shopify lapping last year’s numbers.
In case anyone is interested in the result - it came out to a 51% revenue growth estimate for Q2.
Seems like all our top holdings are growing at 51% these days! (Except Snowflake!)