On Thursday, BTIG adjusted its outlook on Etsy (NASDAQ:ETSY), reducing the e-commerce company's price target to $78 from $87 while sustaining a Buy rating on the stock. Etsy has been experiencing a downturn in discretionary spending, leading to a 3.7% decline in consolidated Gross Merchandise Sales (GMS). Specifically, the Etsy marketplace saw a 5.3% drop in GMS, or 5.6% on a constant currency basis.
The company had previously forecasted a low single-digit (LSD) decline in GMS for the first quarter of 2024, cautioning that a mid single-digit (MSD) decline could occur if growth initiatives fell short. March saw weaker performance than Etsy's management anticipated, partially due to an unexpected impact from the Easter and Spring Break period, which negatively affected first-quarter results but was compensated for in April. Additional pressures arose from ongoing challenges in discretionary categories, overshadowing the positive effects of Etsy's product enhancements.
The U.S. market has been particularly sluggish, with an estimated 8% decline within the Etsy marketplace, while international GMS decreased by 1.5%. Etsy's April GMS was down 2%, and given the tougher comparisons and the benefit from Easter and Spring Break, the company is guiding for second-quarter GMS growth to mirror the first quarter's decline, with potential fluctuations ranging from a 3-6% drop. This projection sets the second-quarter GMS between $2.8 billion and $2.9 billion, compared to the consensus estimate of $3.0 billion.
Despite these setbacks, Etsy's non-spending Key Performance Indicators (KPIs) remained relatively stable. The platform concluded the first quarter with 91.6 million active buyers, a slight quarterly decrease but an increase year over year. The company also acquired 5.7 million new buyers and reactivated 6.3 million buyers, totaling 12.0 million for the quarter, consistent with past non-holiday quarters.
Churn rate for the quarter was down slightly to 13.5%, a 0.2% improvement from the same period last year. The habitual buyer count saw a minor quarterly decrease, while other multi-day buyers remained steady at 37 million. Etsy noted that the primary challenge is the GMS per buyer, which has fallen by 3.5% year over year to $125. The company highlighted that households earning below $100,000 are primarily responsible for the decline, whereas those with incomes over $200,000 have increased their spending on the platform.
Adjusting for the current market conditions, BTIG has revised its full-year 2024 GMS estimate for Etsy to $12.8 billion from $13.3 billion and its revenue estimate to $2.76 billion from $2.84 billion. However, the free cash flow (FCF) per share estimate remains largely unchanged at $5.10. The firm has also modified its target multiple to 14 times from 16 times, to better reflect the softer near-term growth expectations, adding $5 per share for subsidiaries to arrive at the new $78 price target.
InvestingPro Insights
As Etsy navigates the current economic headwinds, a closer look at the company's financial health and market performance can provide investors with a clearer picture. According to InvestingPro data, Etsy boasts an adjusted market cap of $8.18 billion and an attractive P/E ratio of 28.43, which further improves to 21.48 when looking at the last twelve months as of Q1 2024. This indicates that Etsy is trading at a lower price relative to its near-term earnings growth, which is a positive sign for investors seeking value.
Moreover, Etsy's gross profit margins remain impressive at 70.41%, a testament to the company's ability to maintain profitability despite market challenges. This financial stability is complemented by a solid operating income margin of 13.67% for the same period. Notably, Etsy's management has been actively buying back shares, a move that often signifies confidence in the company's future and can be an encouraging sign for shareholders.
InvestingPro Tips highlight that Etsy is expected to be profitable this year and has been over the last twelve months. Additionally, the company's cash flows can sufficiently cover interest payments, and its liquid assets surpass short-term obligations, indicating a strong financial position. For those interested in further insights, there are 11 additional InvestingPro Tips available, which can be accessed through the InvestingPro platform. To take advantage of these insights, readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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