Etsy (NASDAQ:ETSY) is scheduled to report fourth-quarter earnings results after the market close Monday. After trading at yearly highs intraday, ahead of results, markets clearly have high expectations.
And why not? Last quarter, Etsy reported strong GMS, revenue, and adjusted EBITDA margin. That is just financial jargon to describe the firm’s continued focus and solid execution.
Here’s what investors should expect heading into Etsy’s Q4 earnings print.
Strong Results Last Quarter
Etsy reported GMS growing 20.8% YoY to $923 million. Revenue rose a solid 41.3% while adjusted EBITDA came in at $34 million. Etsy attributed its growth to two things: its product investment and pricing structure.
In its product investment, Etsy put its efforts in search and discovery, marketing capabilities, trust and reliability, and seller tools and services. Sellers will appreciate the improvements in the tools and search, whilst the other areas are less obvious as benefits.
The marketing efforts, which includes testing television advertising and posting on social channels, will likely have resulted in strong traffic generation during the all-important holiday period. The downside to the higher spend is that Etsy sellers may face rising fees and additional costs for doing business on the site.
For now, this added burden for sellers will not drive them away. In Q3, buyers willingly spent money and time to find “special” products. In the upcoming Q4 report, GMS per active buyer may surge once again.
Etsy had 2 million active sellers in Q3, up 8% Y/Y while active buyers grew at a faster pace, up 17% Y/Y to 37 million.
Lean Costs, Healthy Balance Sheet
There are two notable data points on Q3 investors should take note. Etsy reported a healthy decline in G&A, to 14% of revenue. This is sharply lower than the 24% of revenue in 2016. This is due to cutting headcount and taking a restructuring charge in the previous year. But as the business grows, this cost will increase over time. The company summed up its uniqueness as a business at its last conference call in this way:
One thing that I do think is different about Etsy, fundamentally different, is that our items, many, many of our items are not sitting in a warehouse and available to ship tomorrow. And I actually think in many ways that’s a strength. They are made for the person who’s buying them. They have the opportunity to be personalized or customized, made-to-order. That’s special. That’s one of the great things about Etsy.
Source: SA Transcript
The “fundamentally different” operating model is driving revenue higher relative to cost increases.
Etsy had a cash balance of $584 million as of September 30, 2018. Add the $31 million in cash generation, and investors will notice that the free cash flow growth will give the company plenty of investing options ahead.
Stock Buyback
With no need to sell stock to raise its cash balance, Etsy may instead use its free cash to buy back stock. This is on top of investing in the business. The Board of Directors approved a stock buyback of up to $200 million. In its upcoming report, management may give an update on how many shares it already bought back. Because at yearly high, it may want to delay buying more shares until the stock pulls back, if ever.
Etsy’s Valuation
Of the four analysts covering Etsy stock, the average price target is $63, according to Tipranks. Valuations are somewhat high on a P/E basis to justify the 9% in additional upside in the stock. Still, Etsy’s management proved itself by growing EPS by over 80% in the last five years. Growth may slow in the next few years but it will still be in the double-digit range.
Bottom Line on ETSY Stock
Etsy’s sellers offer unique, special items that cannot be found anywhere else. So long as the site promotes such items and sellers are not faced with excessively high fee increases, Etsy will thrive.
For now, management demonstrated its abilities in balancing promotional efforts through advertising and investments in the site’s tools to drive growth. The more differentiated it is from the likes of online giants like Amazon.com (NASDAQ:AMZN) or eBay (NASDAQ:EBAY), the longer its profit margins hold.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
