Summary
- ETSY growth during the second quarter was particularly strong and is expected to continue.
- GMS rose almost 150% YoY, and guidance is predicting similar albeit lower growth rates for the upcoming quarters.
- Rising amounts of buyers (new and repeat) should continue to drive growth.
Etsy (ETSY) has seen some incredible growth attributable to the pandemic, but its niche position in the e-commerce sector opens up the door for long-term success. While the previous quarter is likely going to be one of the strongest quarters that Etsy will show in a while (aside from a potentially strong holiday season), it's only a matter of time until it starts posting consecutive quarters of this size and higher. As shares are down about 20% since the high, it could be a great time to buy the pullback ahead of further growth.
2Q growth was stellar as Etsy capitalized on the shift to e-commerce shopping, but also in part to the product mix that was emerging on the site. GMS soared to $2.7 billion, whereas it was barely more than $1 billion last year. Revenues are approaching the half-billion mark, and should eclipse that level on a strong Q4, but that could happen possibly as early as this current Q3.
Source: Etsy Investor Presentation
Etsy's growth in GMS and revenue was driven by an "influx of 18.7 million new buyers and reactivated buyers -those who haven’t purchased in a year or more" during the quarter. Yet while that amount of customers could be a quarterly high, Etsy is still seeing "encouraging data points in customer retention, frequency, and growth in lifetime value" that suggest that long-term customer growth will remain in play.
Etsy is taking targeted steps to ensure that that is the case. After witnessing that tremendous growth, Etsy is using personalized ads and recommendation feeds to work on "increasing the 30 day repeat purchase rate for new buyers by targeting buyers on and off site." This does come at a cost, and higher ad spending will offset revenue gains to a degree, but as Etsy has been and still is profitable, that's not really something to worry about.
Advertising is still important, as Etsy's marketplace offers such a broad variety of items and categories. The traditional top categories include homewares & furnishings, jewelry & accessories, craft supplies, apparel, paper & party supplies, and beauty & personal care. These six categories makeup 75% of the total GMS on the site, and grew 92% overall YoY, driven largely by triple-digit growth in homewares & furnishings and craft supplies. The remaining 25% of GMS comes from non-traditional categories, which saw tremendous 376% YoY growth. Masks and Covid-19 healthy/safety/care items did provide a large amount of growth alone, and could continue to do so as the pandemic has not yet cleared, but growth excluding that is still strong.
This growth-fueled profits - "gross profit for the second quarter of 2020 was $317.4 million, up 159.1% year-over-year, and gross margin was 74.0%, up640 basis points compared with 67.6% in the second quarter of 2019." Margin expansion and higher gross profits led net income to grow over 500% to just slightly $100 million, whereas it was just $18.2 million a year ago.
