The shares entered June slightly down on the year, but investors turned bullish after Etsy announced it was acquiring Depop and Brazil-based Elo7. These deals are part of management’s strategy to build a “House of Brands” portfolio to connect consumers with more sellers and, in the case of Elo7, expand its reach to more geographic regions.
Etsy is looking to keep the millions of new active buyers it gained during the pandemic coming back in the near term. The company is investing in brand marketing, data infrastructure, hiring, member services, and developer experience to support growth.
However, these investments may weigh on profits in the next quarter, as management’s forecast calls for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to sequentially decline to a range of 25% to 28%, compared with adjusted EBITDA margin of 33% in Q1. But Etsy still has a lot going for it beyond 2021.
While the acquisitions of Depop and Elo7 won’t move the needle in the short term, these marketplaces could significantly improve Etsy’s already attractive long-term growth prospects. Depop extends Etsy’s reach to the fast-growing secondhand market, which is popular with Gen Z and millennials. Elo7 gives Etsy a growth path in the one of the fastest-growing e-commerce markets in the world.
The triple-digit growth for Etsy is likely over. Company guidance calls for revenue growth to decelerate to 15% to 25% year over year in the second quarter. During the Q1 earnings call, CFO Rachel Glaser said, “Leading macroeconomic indicators, such as TSA flight information, mall traffic and Google mobility data suggests that as states and countries reopened, activity and consumption in non-retail categories is picking up and this could imply increasing headwinds in the balance of the year.”
Still, the stock doesn’t trade at a superhigh valuation like other growth stocks and still looks like a good investment at these levels.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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