Etsy Earnings Preview: What To Look Out For (NASDAQ:ETSY)

Note: I have written about Etsy previously, investors should see this as an update to my earlier articles on the company.

The time has come again for Etsy (ETSY) to deliver its earnings, this time for the third quarter. Since I have covered Etsy quite extensively recently and am holding quite a substantial amount of my portfolio in the stock, I believe it’s worth outlining the key metrics and performance indicators that I will be looking out for in the results. As before, I remain very bullish on Etsy and still consider the stock undervalued at current levels. I also believe there is a good chance Etsy will exceed market expectations in Q3, although specifically trying to predict earnings feels like a mug’s game at best. I will put these results in the context of my long-term view of the company and the fact I see it as a long-term hold.


#1 – Those growth rates

As many investors already know, what has sent the Etsy share price flying above $100 is the growth rates that have been achieved since March. In Q3, Etsy delivered revenue growth of 136% compared to the prior year. The Q3 results were pretty phenomenal, but Etsy shares actually dipped following its release due to the large run-up before earnings. For the coming quarter, I believe price action is playing more in favor of investors leading up to the earnings release. This is because shares have consolidated between $110-145 over the last few months and I believe these earnings could provide the next leg up. What mainly impressed me from the last quarter was that Etsy showed how profitable they can be at scale. Etsy’s topline growth drove the bottom-line improvement in the last quarter.

I believe Etsy has an opportunity this quarter to give any bear thesis an initial sting. The predominant bear argument towards Etsy I have seen is that its insane growth rates can’t be sustained and to this, I disagree. As I always like to remind investors, one of Etsy’s prime focuses is to make buyers aware of the marketplace. Many people are simply unaware of Etsy’s broad offerings and the sellers’ ability to tailor what they are selling to buyer’s needs. This has only been improving as Etsy has continued to add sellers to their site. The range of offerings on the marketplace is only really going to improve. I believe that sellers on other sites will look at Etsy sellers’ insane growth rates and be enticed to start selling on the site themselves. For me, Etsy is becoming the go-to marketplace for small sellers who want to reach a large audience. On this note, whilst fees can stack up, sellers can use Etsy’s successful offsite ads scheme to attract more buyers onto their shop.

Etsy has seen some strong traffic statistics over the last quarter which improved in Q2. Of course, if Etsy isn’t converting this traffic into sales, it doesn’t matter, but these initial statistics provide some promise for a strong Q3.


As shown above, Etsy actually experienced a dip in site traffic by the end of Q2, while in the first two months of Q3, traffic has bounced back and has touched new monthly highs. The growth slowdown that many appear to be concerned about regarding eCommerce isn’t coming about yet as the transition online continues. Of course, investors should also look towards other eCommerce stocks performance who report before Etsy for an idea of how the broader sector has performed.

The market concerns regarding mask sales contributions to results in Q2 were somewhat put away when the numbers were reported. Masks actually only contributed to 14% of growth in the last quarter. This compared to 93% of growth being attributed to non-mask sales. In fact, the mask sales surge is going to benefit Etsy over the long run as more buyers have now become aware of the site and will potentially look to buy items other than masks in the future after seeing what Etsy has to offer from its sellers. Etsy continues to consolidate its position in the handmade market, and as initial traffic shows this is continuing in Q3. Etsy must continue to apply emphasis on the ‘eCommerce with a human touch’ aspect the company has used to provide a greater connection between buyers and sellers.

On this basis, I believe that sales will be similar or improved to last quarter due to the traffic surge, therefore also reporting strong profitability again, EPS consensus estimates have Etsy reporting an EPS of 60 cents in Q3 and Q4 (though constantly changing), clearly believing that the traction the company has gotten over the last few months will start to fade. On EPS forecasts, Etsy has a forward P/E of circa 60 but with profitability similar to that of last quarter in Q3, this would immediately come down to 57 without any adjustment for Q4 EPS forecast. I believe with strong client acquisition and improved customer trends, as I will go on in a second, can allow Etsy to deliver an even better Q4. As you can see with this, Etsy’s valuation for a high growth company becomes even more appealing. To me, the marketplace truly encompasses GARP. Theoretically, let’s say if Etsy reports 82 cents in Q3 and Q4 as they did in Q2, Etsy would be on a forward P/E of 52. Fairly compelling when considering that profitability only kicked on in Q2. Etsy is expected to report 49 cents EPS in Q1 2021, so from Q2 2020 through Q2 2021, Etsy’s forward P/E would come down to 49. However, I believe that these forecasts aren’t considering the long-term benefits Etsy is going to reap from the pandemic and making customers aware of the brand. This is where the networking effect comes into play as more people use Etsy and become repeat buyers. In Q2, 18.7 million new customers swarmed Etsy’s platform. Etsy is focusing on ensuring they make sure first time buyers return to the platform, this is achieved by personalized and consistent messaging across many channels.

To truly drive the bottom line growth in Q3, Etsy’s offsite ads will have a huge impact. In Q2, offsite ads improved Etsy’s gross margin by 640 basis points, proving Etsy can be very profitable at scale. The significance of offsite ads is that they give Etsy greater exposure to some of their most successful sellers, while minimal sellers can opt-out of the program those selling more than $10,000 a month can’t. If a sale is made when buyers click through an offsite ad across Google, then Etsy will charge a 15% fee if under $10,000 of sales is generated through offsite ads. A 12% fee will be charged if the total sales through offsite ads amount to over $10,000. These fees are clearly quite substantial and may concern potential investors that it would put sellers off from selling on Etsy. But investors must remember that when a large number of sellers are experiencing huge growth in their shops as Etsy gains greater traction, the frustration in this regard is not as strong. Many of those now selling over $10,000 worth a month have done so in many ways thanks to offsite ads and the potential for it to also create repeat buyers. Remember Etsy is building a connection between buyers and sellers. So, many buyers may have come from the seller’s social media page and actually form a connection with that seller. Offsite ads have the potential to initiate these long-term relationships.

#2 – Buyer and seller trends

As I mentioned, I believe customer trends will remain a key focus for investors in Q3. This is really a lot of what the market will be looking at to see if Etsy are able to:

  1. Continue strong customer acquisition
  2. Show strong customer retention (repeat buyers)

These are the two things that will drive long-term shareholders’ value for Etsy. Currently, the company has some 60 million active buyers, making these repeat buyers over the long run will be game-changing for Etsy.

However, it’s not only about how much customers spend but also where they spend it. Last quarter, Etsy put their foot in the door in many of the biggest sectors, with huge growth in areas such as health and beauty, and apparel. Etsy has the ability to put themselves amongst the big boys in these areas. It’s Etsy’s repeat buyers that will drive long-term shareholder value. Etsy must prove they can build strong relationships between buyers and sellers and Q3 is another important step in showing they can do this.

What forms Etsy’s defense is its sellers. Etsy gives them the platform to grow but they then must deliver on the product and relationship with customers. In many cases, Etsy sellers build their own presence by using social media channels. While this doesn’t give Etsy fees from offsite ads, Etsy still takes a cut from their basic fees. Etsy can make further ground over consolidating its dominance in the handcrafted and differentiated market. Remember that 88% of buyers on Etsy think the marketplace has items you can’t find anywhere else, this differentiation is what will set Etsy apart from the rest.

As CFO Rachel Glaser highlighted in the Q2 press release:

Although it is early days, we are already seeing encouraging data points in customer retention, frequency, and growth in lifetime value that are a result of our product and marketing investments.

#3 Cost control and marketing spend

Last quarter, Etsy showed its ability to achieve strong profitability when scaling up revenues. I believe that marketing spend and costs will remain relatively unchanged from last quarter, primarily due to how effective it was for Etsy. Of course proportionality, the top line should accelerate more than costs in order to achieve even stronger profitability.

Last quarter Etsy deployed $118 million towards marketing (27% of Etsy’s revenues). Whilst this is a sizable proportion it shouldn’t come as a surprise to investors. Etsy is still a relatively early stage eCommerce play and is still in the stage of huge growth as it looks to address a market Etsy believes is worth $100 billion. Due to the fact Etsy isn’t known by many consumers high marketing spend is necessary. Competitors like Amazon have a far greater online presence and brand awareness that is now largely driven through natural networking – this means Amazon (AMZN) only has to spend some 5% of its revenues on marketing. One day I believe Etsy will not have to use as much of the revenues they obtain towards marketing but over the medium term, this is necessary in order to grow the top line and bring more traffic for the sellers that rely on Etsy for both part-time or full-time income.


I am excited to see Etsy’s Q3 results, as I am sure many other investors are too. This quarter will have significance in showing the market that Etsy is still reaping the benefits of the traction it saw in Q2. So far traffic statistics have been promising and I am of the belief that Etsy can exceed expectations in Q3. Of course, playing earnings can largely be a gamble, particularly now that Etsy is touching all-time highs once again. What I will say though is that Etsy remains a strong long-term buy. The company encompasses GARP. The growth can be sustained and whilst it may tail off in the near term (Q1 2021), the traction Etsy has received through COVID will transform the long-term viability of the company and has accelerated its growth plan. Buy and hold Etsy.

I hope you enjoyed this article, I plan on writing another article on Etsy following the Q3 report – make sure to follow me to see more Etsy and other equity content. Thanks for reading.

Disclosure: I am/we are long ETSY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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