00:00 Etsy stock got a boost from the pandemic. With so many people stuck at home, many turned
00:05 to crafting and online shopping. Since then however, revenue growth has slowed and the
00:09 stock has come back down to earth. At the latest share price, the company has a valuation
00:14 of $9.4 billion. It's got $1.2 billion of cash on the balance sheet and $2.3 billion
00:20 of long term debt, so the enterprise value is $10.5 billion. Revenue over the last 12
00:26 months is $2.7 billion with $731 million of adjusted EBITDA and $660 million of free cash
00:33 flow. Net income however at -$717 million has been impacted by stock based compensation
00:41 and increased spending in product development. So Etsy is valued at 3.4 times revenue, 14
00:47 times EBITDA and 16 times free cash flow. The story at Etsy is really about growth going
00:53 forward. The pandemic pulled forward demand and that is clearly seen in the flattening
00:57 growth rates across the board. Gross merchandise sales across the company dropped 0.6% year
01:03 over year. Revenue increased by 7.5% but adjusted EBITDA still dipped by 1%. In fact EBITDA
01:11 margins have fallen from 28.3% to 26.4% and that's despite the company raising seller
01:19 fees.
01:20 Some fools might argue that Etsy is showing signs of its business stabilising since gross
01:24 merchandise sales are falling at a slower rate than in previous quarters. They might
01:29 also point to stabilising repeat buyers and a 3% increase in total active buyers to 91
01:36 million. But a 3% increase isn't scintillating growth. Pretty much every metric is showing
01:41 only modest performance and that includes company guidance.
01:45 The number of habitual buyers on the platform continues to decline from 8 million in 2022
01:51 to 7.1 million in the latest quarter. The truth is that Etsy operates in a relatively
01:56 small niche market. The overall takeaway from all of these results is a flat lining of performance.
02:02 If you assume that Etsy can grow its revenue at 10% per year for the next 10 years then
02:07 operate with an 18% net income margin. Revenue in 10 years time would be roughly 7 billion
02:13 and net income would be roughly 1.3 billion. Apply a 20 times multiple and the valuation
02:19 gets to 26 billion which works out to an investment return of 10.7% a year.
02:25 The problem is that might be an optimistic forecast. Ebay for comparison manages only
02:30 a 14% net income margin and trades at a P/E of only 18.
02:35 Etsy may be able to increase its earnings by raising its fees further but that isn't
02:40 going to solve the problem of future growth. The stock isn't particularly expensive now
02:44 but it's also not compelling which is why I give the stock a neutral rating but these
02:48 are my personal opinions not financial advice and I've got no position in Etsy stock.
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