Etsy: Macro environment biggest factor for e-commerce site

Thu, Feb 22, 2024, 7:15 AM

SEANA SMITH: Well, Etsy shares another reading on the consumer trading in the red. Now this move to the downside coming despite the fact that it beat the street's estimates on some key metrics. E-commerce company here posting lackluster guidance though as it points to a slow start to its fiscal year. And that's why we're seeing shares in the red. So joining us now talking about what's ahead for this company.

I want to bring in JMP equity research analyst Nick Jones. Nick, it's good to see you here. So they did beat when it comes to their most recent quarterly results but that guidance and the warning here of a softer 2024 pressuring shares. Do you think they move lower in the stock, is that warranted?

NICK JONES: Yeah, I think it is. Etsy is one of those platforms that's always commanded-- the stock's always commanded a higher multiple. So if you want to command a higher multiple, you got to give better than expected results. So I think when you come in with a little softer than expected guidance, that resets expectations, the stock usually moves accordingly.

That all said, we really like the stock here, we think the price is an interesting entry point. And there's a lot of green shoots in the business despite the slow start.

- In one of your most recent notes as well. I mean, you talk about the language learning models, the generative AI, the investment and product development. What do you expect to see on the investment front and how will you be tracking to see where that actually shows up in some of the financial performance at the end of the day too.

Where customers are feeling like they have a more enriched experience that leads them to drive up that gross merchandise sales and volume on the platform?

NICK JONES: That's a great question. I mean, one of Etsy's biggest opportunities is unlocking frequency. It's getting buyers to spend and then come back and do it more frequently. Etsy has no SKUs, there's no barcodes. It's not easily indexable listings on their site. So by deploying large language models and generative AI, they can start deploying tools that help users get to what they want faster.

And an indication of this is their recent launch of a product called, a technology called gift mode where you can go through a generative AI powered funnel to get a gift for a loved one. If you're trying to whittle it down and you don't want to spend the time searching through all the listings, they can curate it for you using that technology. So I think that's just early signs of what's to come of where they're going to be investing behind.

SEANA SMITH: What does that then mean Nick here for revenue in terms of the bottom line impact that you're seeing down if you take a look at 3 to 5 years from now once we get a little bit more traction on that new product?

NICK JONES: It's really tough to say, so they just launched this before their first ever Super Bowl campaign a couple of weeks ago. So it's really early to determine what that's going to look like. I think really the driving factor behind growth is they had a massive pull forward of demand during the pandemic.

They still maintain most of the buyers from that, they're lapping tough comps. When we start looking at 3 to 5 years out, I think the key driver is going to be the macro environment. We looked at the back 1/2 of this year and decreasing interest rates as an indication of probably a more aggressive consumer in terms of discretionary spend as they start to feel more comfortable about their financial situation.

So I think the macro is really the driving factor of what things are going to look like. And all of these investments today, should just help them accelerate growth out the other side of the current pressured consumer.

- Nick, very quickly here, you got Timu that ran like 15,000 commercials during the Super Bowl. You've got on the other side Sheehan that's looking to make a public debut. You've got fast fashion that absolutely just drives so much of the clicks, the search on social media platforms as well. How does Etsy really maintain and retain consumer mindshare in that environment? We only got about 20 seconds.

NICK JONES: Yeah, that's a great question. Really, Timu and Sheehan are flooding the ad markets with what appears to be a rational spend. So the real question Mark, I think for most investors are, how long will they keep this up? And do they pull back eventually bringing down cost per clicks for the rest of the e-commerce players? We don't really view them as an existential threat to Etsy.

More is distorting the advertising market making the LTV, the customer acquisition cost a little more challenging for companies like Etsy. So near term problematic for advertising, long term, we don't really see them as direct competitors to Etsy.

SEANA SMITH: All right. Nick Jones, always great to have you insight here on Etsy.

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Etsy: Macro environment biggest factor for e-commerce site

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