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Why Is Etsy (ETSY) Up 17% Since Last Earnings Report?

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A month has gone by since the last earnings report for Etsy (ETSY - Free Report) . Shares have added about 17% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Etsy due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Etsy's Q2 Earnings Beat, Revenues Miss Estimates

Etsy delivered second-quarter 2021 earnings of 68 cents per share, which surpassed the Zacks Consensus Estimate by 15.2%. However, the bottom line was down 9.4% from the year-ago quarter and 32% from the prior quarter.

Revenues advanced 23.4% year over year but declined 3.9% sequentially to $528.9 million. Notably, the figure missed the Zacks Consensus Estimate of $531.5 million.

Year-over-year top-line growth was driven by accelerating Marketplace and Services revenues. Solid momentum across both buyers and sellers contributed well. Strengthening gross merchandise sales (“GMS”) were other tailwinds.

The company remains optimistic about its acquisitions of Reverb, Depop, and Elo7. Its growing investments across marketing channels remain positives. Advancing search algorithms, robust Etsy Ads and the integration with Etsy Payments are other positives.

Top Line in Detail

Marketplace revenues were $395.5 million (74.8% of total revenues), which went up 19.1% from the year-ago quarter. This was driven by strong momentum across buyers. The company witnessed the addition of 11.9 million new and reactivated buyers on its Marketplace platform in the reported quarter. Strong traction across habitual and repeat buyers, which grew 115% and 61%, respectively, contributed well.

Services revenues were $133.4 million (25.2% of total revenues), which rose 38% on a year-over-year basis. Solid momentum across sellers, owing to the robust Etsy Ads program, remained a major positive.

Quarter in Detail

Etsy’s active buyer base grew 50.1% from the prior-year quarter to 90.5 million. The active seller base stood at 5.2 million, which was up 66.7% year over year.

Notably, GMS of the company was $3.04 billion, which rose 13.1% year over year.

The ETSY marketplace’s GMS was at $2.8 billion, up 14.2% from the prior-year quarter.

However, GMS from paid channels, which accounted for 19% of total GMS, contracted200 basis points (bps) year over year.

Operating Details

In second-quarter 2021, gross margin was 71.8%, which contracted 220 bps year over year.

Further, total operating expenses were $290.8 million, reflecting an increase of 46.7% year over year. However, the figure, as a percentage of revenues, expanded 870 bps from the year-ago quarter to 54.9% in the reported quarter.

Per the company, operating margin was 16.8%, contracting from 27.8% in the year-ago quarter.

Balance Sheet & Cash Flows

As of Jun 30, 2021, cash and cash equivalents totaled $2.05 billion, which increased from $1.16 billion as of Mar 31, 2021. Short-term investments were $430.7 million, down from $502.6 million in the previous quarter.

Long-term debt stood at $2.3 billion at the end of the second quarter, up from $1.3 billion at the end of the previous quarter.

The company generated $121.7 million in cash from operations inthe reported quarter compared with $148.5 million in the prior quarter.

Free cash flow in the reported quarter stood at $116.4 million compared with $144.7 million in the last quarter

Guidance

For third-quarter 2021, it anticipates total revenues between $500 million and $525 million, suggesting year-over-year growth of 13.5% at the mid-point.

Further, GMS is expected to be $2.9-$3 billion, indicating growth of 12.5% at the mid-point from the year-ago quarter’s reported figure.

Adjusted EBITDA margin is expected to be 25%, including the impacts of the Depop and Elo7 buyouts.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Etsy has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Etsy has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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