AI Integration And Customer Experience Upgrades Will Boost Engagement And Diversify Offerings

Key Takeaways

• Enhanced customer experiences and AI integration aim to increase engagement and revenue through improved listings and loyalty initiatives.
  
• Expanding payment platforms, optimizing ad take rates, and leveraging brand growth support diversified revenue streams and financial efficiency.
  
• Declining GMS, reduced active sellers, and macroeconomic headwinds pose challenges to Etsy's revenue growth and profitability in a competitive, cost-sensitive market.

Catalysts

Operates two-sided online marketplaces that connect buyers and sellers in the United States, the United Kingdom, Germany, Canada, Australia, and France.

• Etsy's focus on improving customer experiences, such as enhanced gifting and loyalty programs, and integrating AI into search to boost the diversity and quality of listings, is expected to increase engagement and potentially drive higher revenue in the future.
  
• The strategy to boost app engagement by revamping the app homepage and encouraging downloads through interventions during mobile web visits aims to increase buyer lifetime value, potentially impacting long-term earnings positively by leveraging increased buyer activity.
  
• The introduction of Etsy Insider and efforts to improve search algorithms with inputs from selling charges and return policies are designed to foster repeat purchases and increase purchase frequency, likely benefiting net margins and earnings as user engagement strengthens.
  
• By expanding payment platform penetration and optimizing Etsy Ads, Etsy is enhancing its take rate without negatively impacting seller margins, indicating a potential for sustained revenue growth and improved financial efficiency.
  
• With substantial growth in merchandise sales through Depop and strategic partnerships on Reverb, Etsy's House of Brands is positioned for a diversified revenue stream that could positively influence group earnings and enhance overall market value.

Etsy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Etsy's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $372.5 million (and earnings per share of $3.16) by about December 2027, up from $256.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $492.3 million in earnings, and the most bearish expecting $259 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2027 earnings, down from 26.7x today. This future PE is greater than the current PE for the US Multiline Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 1.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Etsy Future Earnings Per Share Growth

Risks

• Declining GMS: Despite the modest growth in overall revenue, Etsy's Gross Merchandise Sales (GMS) declined by 4.1% year-over-year, with particular pressure on the U.S. domestic trade route, signaling potential long-term challenges in maintaining or increasing sales volumes, which could impact overall revenue growth.
  
• Reduced Active Sellers: The number of active sellers on Etsy decreased by 8.5% year-over-year, potentially limiting the diversity and volume of merchandise available. This could hinder the marketplace's ability to grow its revenue and maintain its competitive edge.
  
• Consumer Spending Trends: With discretionary spending on the continuous decline, especially in top categories, the trend of consumers prioritizing discounts over unique or handmade items might further pressure Etsy's revenue and profit margins.
  
• App and Search Experience Adjustments: Efforts to revamp the Etsy app and search algorithms have introduced friction that could impact immediate conversion rates and GMS, suggesting potential short-term negative effects on revenue despite long-term strategic intentions.
  
• Macroeconomic Headwinds: Various macroeconomic factors, such as foreign exchange headwinds, high marketing spend, and competitive pricing pressure, could adversely affect Etsy's net margins and overall profitability amidst a challenging retail environment.

Valuation

• The analysts have a consensus price target of $62.15 for Etsy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $105.0, and the most bearish reporting a price target of just $44.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.2 billion, earnings will come to $372.5 million, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 7.6%.
• Given the current share price of $60.97, the analyst's price target of $62.15 is 1.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.