It’s difficult to imagine a better earnings report than the one Etsy (NASDAQ:ETSY) delivered on Wednesday. Yet investors shrugged: ETSY stock declined 3.6% in regular trading Thursday.
Admittedly, Etsy had more than quadrupled from March lows heading into the report. A “sell the news” reaction is to be expected. And we’ve seen similar trading this week in other growth names.
As I detailed this week, Activision Blizzard (NASDAQ:ATVI) also saw a blowout quarter greeted with a shrug. On Thursday, high-flyers Alteryx (NYSE:AYX) and Datadog (NASDAQ:DDOG) both fell in after-hours trading despite crushing Street expectations.
In that context, the trading in ETSY stock isn’t that surprising. And it also isn’t anything to worry about. Etsy has a hugely attractive long-term growth story, and the Q2 results only confirm that story. Thursday’s trading will soon be forgotten, as it should be. And from there, Etsy should roar to new highs.
Etsy Crushes It
It certainly wasn’t an overreaction to headline numbers that drove Thursday’s selloff. Etsy’s results were jaw-dropping.
Revenue increased 137% year-over-year. Incredibly, that was 54 percentage points better than Wall Street predicted. It bears repeating: 54 percentage points. I’m hard-pressed to remember a beat of that size in the last 20 years, let alone this earnings season.
Earnings per share, based on Generally Accepted Accounting Principles, nearly doubled consensus, coming at 75 cents against the Street’s 39 cents. The figure rose more than 400% year-over-year.
To be sure, the novel coronavirus pandemic likely provided a boost. Etsy has a number of sellers offering handmade masks. “Stay at home” orders no doubt created new customers and probably new sellers as well. And recent results from the likes of Overstock (NASDAQ:OSTK) and Amazon (NASDAQ:AMZN) highlight an accelerated shift to online shopping.
If you pay attention to my investment newsletter, Matt McCall’s Investment Opportunities, you’ll know that there are other stocks out there which don’t need a Covid-19 boost to shine. These companies are developing revolutionary technologies that will be used by millions — if not billions — on a global scale. But that’s not to say that ETSY stock isn’t an all star in its own right.
Even considering the pandemic benefits, the quarter impressed. After all, analysts were well aware of the potential pandemic boost, and Etsy still crushed their expectations. And as Chief Financial Officer Rachel Glaser told Barron’s, there was a lot more than masks at play in the quarter.
“Everyone was at the top of their game,” Glaser said. She went on to note that the top six categories (none of which are masks) posted strong growth. Etsy is even competing with Overstock and Wayfair (NYSE:W): home and living sales increased 128% year-over-year.
Investors couldn’t have asked for anything more from Q2. And the quarter will have an impact that lasts for some time.
A Foundation for Growth
There are two more key metrics from Q2 that investors should consider. In the quarter, Etsy added 18.7 million new buyers and reactivated buyers.
A skeptic can point to the results and argue that the pandemic won’t exist forever, and thus Etsy’s growth will come back to Earth. But when a company adds and/or recaptures almost 19 million customers in three months, that alone sets the table for higher sales going forward.
The second metric relates to international growth. Gross merchandise sales (i.e., the amount of product sold by Etsy sellers) more than doubled internationally as well. Overseas markets are a key pillar of the long-term case for ETSY stock.
On top of that, it’s worth noting a passage from Barron’s informed by its interview with CFO Glaser: “[T]he company is investing in data analytics and machine learning to help personalize their recommendations and tailor communications in a bid to increase customer loyalty.”
The benefits of Big Data only increase with more data. 19 million new and reactivated users provide a lot of data. Etsy can better tailor its emails, as Glaser noted, and even its website to drive more sales.
The path to long-term growth is wide-open after Q2.
Is ETSY Stock Too Expensive?
Skeptics might retort that even this quarter, and this bull case, are more than priced in. Again, Etsy has rallied 336% off March lows. It trades at 90x trailing earnings.
But here, too, Q2 matters. Earnings quintupled year-over-year. On a run-rate basis, Etsy easily could generate more than $3 in EPS annually. Start modeling in those kinds of profits and the stock doesn’t look expensive. Given the long-term opportunity, it looks cheap.
Why did the market sell ETSY stock on Thursday, then? It’s hard to see with certainty. From here, fatigue looks like the most likely answer. Some investors who were up big may have taken profits no matter the report.
Whatever the cause, I don’t think this selloff will last very long at all. Coming out of earnings, Etsy looks like one of the best growth stories in e-commerce. That should be more than enough for the rally to resume.
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