Etsy leadership executing ‘stellar’ e-commerce growth, analyst says

Evercore ISI Director of Internet Equity Research Shweta Khajuria joins Yahoo Finance Live to discuss Etsy sales, the company’s leadership, and the outlook for growth.

Video Transcript


AKIKO FUJITA: Disappointing guidance is dragging shares of Etsy lower. You see it’s down more than 15% in this session. The e-commerce company reported earnings and revenue pretty much in line with estimates, but it guided lower for the current quarter with CEO Josh Silverstein pointing to increased competition coming out of the pandemic. Let’s bring in our guest. Next, we’ve got Shweta Khajuria, Director of Internet Equity Research Evercore ISI. Shweta, it’s good to talk to you today.

We heard Josh Silverstein say yesterday pretty bluntly consumers just have more choice. It’s no longer the last two years where everybody was on this site consuming in a significant way. How much of this– or is this just the beginning of what we’re likely to see as a meaningful pullback in this company– for this company?

SHWETA KHAJURIA: Well, first of all, Thanks for having me. So I think there are a few things. One is that this pullback that we are seeing, in my opinion, is likely going to be transitory because what Josh also mentioned was there are several factors at play and some of them may be transitory. And for example, reopening economies. Mobility is increasing and more people are going out for shopping at physical stores. Second, mix shift to travel. There’s a lot of pent-up demand for travel and for experiences and restaurants and that will normalize at some point.

Third is Ukraine war. Let’s hope that is transitory and that’s weighing on the stock because they have 45% of their business international. And fourth is FX, and that could also be transitory depending on where the foreign exchange goes this year and next year. So I think that, if you put it all together, there are a lot of factors that I think would be short term and beyond Etsy’s control. What is in Etsy’s control is how they operate and how they manage the business.

If you actually look at the three year CAGR, where Etsy was before COVID versus where it is now, on a three-year annualized growth rate basis, Etsy is still growing at a meaningfully faster rate than back in, call it, the first quarter of 2019. What does that tell us? That tells us that the retention of the buyers that they gained– they gained a ton of buyers over the COVID period– they are retaining them and those buyers are purchasing more frequently. That is, that the gains that they had during COVID, they are retaining all of them. And now the question is, how are they going to take this bigger base of business that they have and grow from here.

And finally, my thought is that going forward, yes, near-term we think that it’s going to be choppy, it’s going to be uncertain because nobody really knows how macro is going to play out. But long term, Etsy’s execution has been stellar with Josh and Rachel as the CEO and CFO. And I think that they have a lot of levers in play that allow the company to grow faster than the overall e-commerce market.

BRIAN CHEUNG: Shweta, it’s Brian Cheung here. Now, I actually caught the earnings call and I caught your question to Josh about future drivers, right? Product improvements, other possible revenue streams, and what the longer term future for this business looks like. What did he tell you? I mean, it sounds like there’s a focus on maybe improving customer data so that they can get more targeted products to them. Were you satisfied with what they’re seeing as their longer term vision?

SHWETA KHAJURIA: Absolutely. There are three key levers. One is growing new buyers, meaning attracting more and more buyers to the platform. They’ve been beneficiary of COVID and I think that their marketing spend will allow them to grow buyers, not only in the United States, but also in international markets. The second lever is purchase frequency. Of all of us buying on e-commerce sites, how much more can we buy every year from the same website? And that’s the biggest lever that they can pull and they have control over.

And then the third is the average order value. Excluding inflation, our basket size is growing bigger. And I have a lot of confidence in the first two levers with Etsy. One is the buyer growth. They’re spending a lot of money in marketing. They’re not pulling back on their marketing spend despite the near-term challenges and their brand awareness has increased significantly post-COVID. So it’s more on top of mind of consumers than it used to be back in 2019.

And in terms of purchase frequency and my question that you’re talking about that I asked during the call, I think the best metric to measure their success on purchase frequency is GMS per active buyer and that has been growing every single quarter since COVID and that’s the sign of success that the same buyer is buying more frequently on their platform.

AKIKO FUJITA: Shweta, we recently saw some sellers on the platform go on strike, protesting specifically the higher transaction fees. And this is kind of the issue that we have heard from so many companies having to deal with the pushback. Etsy’s a little more of a unique position, though, because it is not workers per se. It’s the sellers they have on their platform. How big of a headwind do you think that’s going to pose? Right now it’s just a small group, but do you anticipate this momentum to grow?

SHWETA KHAJURIA: I think I’m an optimist on this one, too. They have done this before. A few years ago they increased their take rate from 3.5% to 5% and they saw pushback from sellers at that time as well. The probability of unhappy sellers being more vocal is almost always high on these media platforms versus those who are actually supportive of it.

So based on our conversations with the company and the data that they are seeing, the pushback on the increase this time has been less than what they saw last time a few years ago. And only 1%, which you talked about– only a small percentage of their sellers have shown any sort of protest. But the one thing that we may want to remember is that Etsy is not supplier constrained.

I mean, Etsy would not say this, but they could afford to lose some sellers and still not take a hit to their top-line growth because they have such a long tail of sellers and they are just not supply constrained. What they would want is greater flow of dollars shifting from other retail players into Etsy’s platform.

BRIAN CHEUNG: Very interesting dynamic at play there. Shweta Khajuria, Director of Internet Equity Research at Evercore ISI, thanks so much for stopping by this morning. Appreciate it.