Best Stocks for 2018: Etsy Inc Says Amazon Who?

Best Stocks for 2018: Etsy Inc Says Amazon Who?

Source: kenary820 /

Etsy, the global marketplace for creative goods, has long been out of favor among investors, and who could blame them? The company had never posted any earnings, despite growing its customer base in the years since the 2015 IPO.

But Etsy continues to have strong name recognition among both sellers and consumers.

2018 has started with a bang for the company, as its new management was able to capitalize on a strong holiday season to push through its new strategic vision.

It’s building on that momentum in the new year.

Fourth Quarter of 2017 was Better Than Expected

2017 was tough on the company and the company’s culture as cost-cutting and layoffs demoralized employee morale.

But the team rallied for the holiday season as revenue jumped 23.6% to $136.3 million. It was due to growth in both Marketplace and Seller Services revenue.

Marketplace revenue jumped 15.6%, due to growth in transaction fee revenue. Growth was impacted by the issuance of free listings for promotional activities meant to drive growth to the international markets.

Seller Services revenue rose 33.3% year-over-year, due to revenue growth in Etsy Payments. Gross margin rose 110 bps to 67.5% from 66.4% in the year ago quarter.

You can really see the impact of the layoffs in the operating expenses numbers. They were up 5.7% year-over-year to $73.8 million, but represented just 54.1% of revenue, which was down from 63.3% of revenue in the fourth quarter of 2016.

The 4 Key Initiatives are Working

Remember, Etsy has a turnaround strategy in place and it entails four key initiatives.

  1. Improving Trust and Reliability. Its goal is to bolster trust in the Etsy brand, and by extension, to the sellers themselves since the sellers are relatively unknown. It launched a Best Seller badge in 2017 to further this initiative which proved wildly popular.
  2. Enhancing Search and Discoverability. Etsy has over 50 million items on the site, which has created a problem in the past because customers had difficulty easily finding what they wanted. But it’s now using artificial intelligence and machine learning to streamline the site and tailor it to specific customer needs. It also launched Scarcity Badges, which alert customers that there may not be many of certain items left, which boosted conversion rates.
  3. Building World-Class Marketing Capabilities. In 2017, Etsy discovered that about 88% of its visits came to from organic channels such as direct, SEO, email and push notifications. In 2017, it set out to revamp its email management system to allow it to send more personalized and targeted emails to buyers.
  4. Providing Best-In-Class Seller Tools and Services. In 2017, it introduced several new tools which would help sellers run sales and promotions. It also held the site’s first ever Cyber Monday shopping day, which increased seller sales.

Strong Guidance for 2018

Etsy also provided its first guidance for 2018. It’s expecting to see a continuation of the momentum at the end of 2017. Year-over-year revenue growth is expected to be in the range of 21%-23%.

GMS year-over-year growth is also forecast in the range of 14%-16%.

Sellers “Believe”

The use of the promotions, like Cyber Monday, and the addition of Best Seller Badges are going a long way to appease sellers on the site. What do the sellers want to do? Sell more. And that’s what these initiatives are doing.

In late 2017, everyone was worried about, Inc. (NASDAQ:AMZN) and its newly launched Amazon Handmade site.

During the holiday season, Amazon offered free last-minute shipping on many of its creative items on the site. Free shipping is Amazon’s key advantage, right?

But are shoppers seeking out Amazon Handmade versus Etsy?

I had to Google the name, because I couldn’t remember what Amazon was calling its creative marketplace. But many consumers are familiar with Etsy’s name. It has built that name, over the prior 5-plus years, into a trusted consumer brand.

Now it just needs to execute.

Shares Soar on the Solid Quarter

The fourth-quarter results reassured Wall Street that Etsy’s turnaround strategy was for real. Fears about Amazon also receded.

2018 earnings estimates have risen since the earnings report. Etsy is now expected to make 36 cents in 2018 versus the 38 cents it made in 2017. That’s a slight decline, but I believe the analysts are still being conservative. This was just one quarter, and Etsy didn’t provide EPS guidance.

Here’s what the price and consensus chart now looks like.

You can see that the 2018 consensus is looking a little more bullish now.

Etsy is a Growth Stock

After the big earnings pop, the stock now trades with a forward P/E of 78. It is clearly a growth stock. But with revenue projected to grow 22.5% in 2018, it’s giving you the growth.

It’s going to have to continue to execute at a high level to justify this type of valuation, however.

But I believe the company is on the right track to do that.

Tracey Ryniec is an Equity Strategist and Portfolio Manager at Zacks Investment Research. She manages the Insider Trader and Value Investor services. As of this writing, she did not own shares of any of the aforementioned securities.

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