Etsy Threatens to Break Through Support After Ugly Decline
Th e-commerce firm is a falling knife for investors after very modest revenue growth.
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On Wednesday morning, Etsy Inc ETSY released the firm's fourth quarter financial results. For the three-month period ended December 31, ETSY posted a GAAP EPS of $1.03 on revenue of $852.162 million. While the bottom-line result was good for a decisive beat of consensus view, the top-line print fell short of Wall Street's expectations and was good for year-over-year growth of just 1.2%.
Perhaps more important and more disappointing than the very modest revenue growth was the fact that consolidated gross merchant sales (GMS) were just $3.7 billion, which was down 6.8% year over year. Etsy marketplace GMS were down 8.6%, while active buyers contracted by 2.6%. The entire headline print for revenue growth was due to 8.1% growth in revenue provided by the sales of services.
Bottom line? The holiday season came, and the holiday season went. Etsy is just not as cool as it once was. In addition, the firm provided guidance that did not impress. Not in the least. On the bright side, the firm was able to reactivate 9.8 million lapsed buyers and acquired 6.9 million new buyers. Still, as mentioned above, active buyers contracted, so treat that information as you will. Active sellers contracted a whopping 10% from the year-ago comparison. That's really, really ugly.
Etsy Operations
As total revenue increased 1.2% to $852.162 million, the cost of that revenue decreased 14.8% to $217.691 million. This left a gross profit of $634.471 million (+8.2%) as gross margin improved dramatically from 69.6% to 74.5%. Total operating expenses grew 1.7% to $479.339 million. This put the firm's GAAP operating income at $155.132 million (+34.4%) as operating margin improved from 13.7% to 18.2%.
After accounting for other income and expenses as well as taxes, GAAP net income increased a very nice 52.4% to $129.906 million. That works out to $1.03 per fully diluted share, up sharply from the year ago comp of $0.62.
Etsy Stock Fundamentals
For the period reported, ETSY generated an operating cash flow of $752.469 million. Out of that number came capex spending of $14.208 million and website and app development costs of $29.29 million, leaving free cash flow of $708.971 million. The firm does not pay shareholders a cash dividend, but did repurchase $723.899 million worth of common stock during the quarter. The cash flows are healthy. I'd rather see a larger portion of this free cash flow put towards reducing the debt load instead of repurchasing shares, but the firm does have the flexibility to do that if these cash flows can be sustained.
Turning to the balance sheet, ETSY ended the period with a cash position of $1.039 billion and current assets of $1.328 billion. Current liabilities add up to $665.113 million, including a small amount of deferred revenue, but more importantly, no short-term debt. The firm's current ratio stands at 1.99, which is healthy enough.
Total assets amount to $2.418 billion, including intangibles of $550.987 million. At 22.8% of total assets, this is not an awful number. Total liabilities less equity comes to $3.177 billion including long-term debt of $2.288 billion.
That's right. The firm has long-term debt of $2.288 billion, which by the way puts shareholder equity into negative numbers ($-758.866 million) and still chose to repurchase more in common stock than the firm had for the quarter in free cash flow. Gee whiz, talk about mismanaging free cash flow. This firm, even with its business in decline, has enough in operating and free cash flows to correct its long-term outlook, but management would have to get serious about the balance sheet in total and not just the current situation.
Etsy Guidance
For the current quarter, ETSY sees consolidated GMS declining at a rate to the year-over-year performance reported for Q4 2024. Oh, the firm also sees an adjusted EBITDA margin of 25% to 26%.
My Thoughts on Etsy Stock
Margins are improving. That much is true, so there is some excellence in corporate execution going on here. The current situation is solid, so the firm will have no problem meeting short- to medium-term obligations. Cash flows are robust, which would make it possible to make considerable progress on correcting the ugly long-term outlook for the balance sheet in a few years. There has to be the will to do so though, especially if the business is expected to continue to decline. I really cannot support initiating a long position in ETSY until there are changes made in the C-suite or the current members of the C-suite change how they manage their cash flows while they have them.
Readers can see on this weekly chart that ETSY has been in full "train-wreck" mode since January 2023. (Actually, longer than that, but there was a pandemic era pop.) CEO Josh Silverman has been in that position since 2017. His first few years were spectacular. His last few? Yikes.
Back to the daily chart, readers can see that after some December volatility, ETSY had gone into a basing period of consolidation. Wednesday morning, the stock is threatening to break through the support level provided by that base, which has already survived a plethora of tests from above since late December.
If it does crack? The $47 from last October is one place to maybe catch a falling knife. If not there? Spin the wheel. After that, it's just gambling. I'm not telling you what to do. I'm telling you that I'm not buying these shares.
At the time of publication, Guifoyle had no positions in any securities mentioned.
