The 9% post-earnings decline that Etsy (ETSY) is witnessing arguably has much in common with the tumbles that companies such as Atlassian (TEAM) and Square (SQ) have witnessed in recent weeks following reports that were hardly terrible, but didn't live up to very high expectations.
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To recap: After having comfortably beaten Q4 estimates across the board in February, Etsy delivered a more mixed set of Q1 numbers on Wednesday. EPS beat estimates, but revenue slightly missed and gross merchandise sales (GMS) just slightly beat.
In addition, after having issued full-year revenue and GMS guidance in February that was easily better than what analysts forecast, Etsy just slightly improved its outlook on Wednesday as (like many other U.S. multinationals) it deals with foreign exchange headwinds. The company now expects 30% to 32% revenue growth and 18% to 21% GMS growth, after previously forecasting 29% to 32% revenue growth and 17% to 20% GMS growth.
There's nothing in Etsy's Q1 report or earnings call to put its long-term growth story into doubt. While revenue growth (40% in Q1) will slow after Etsy passes the one-year anniversary of fee hikes carried out in mid-2018, GMS growth (19% in Q1) remains healthy and active buyers and sellers also rose by a double-digit clip last quarter. In addition, the momentum behind Etsy's value-added services, which covers things such as ads, shipping labels and website-building tools and now makes up about a quarter of its revenue, should allow revenue to grow moderately faster than GMS after the price hikes are lapped.
Many of Etsy's Q1 numbers were solid. Source: Etsy.
With the help of good execution and a loyal core user base of craft/vintage goods buyers and sellers, Etsy has done a pretty good job over the years of fending off competition from Amazon.com (AMZN) , eBay (EBAY) and others. And with just 38% of its GMS currently coming from international markets, there's clearly more room to expand overseas.
But...Etsy went into earnings with its share price up 54% in 2019 and over 125% over the previous 12 months. That left its stock valued at more than 8 times Etsy's expected 2020 revenue, more than 60 times its expected 2020 GAAP EPS and more than 30 times its expected 2020 free cash flow.
At such multiples, simply providing revenue and GMS figures that are close to analyst estimates isn't enough to keep markets satisfied. For many high-flying Internet and software names, near-term sales growth expectations have clearly risen above official sell-side estimates, and any failure to live up to those high expectations is met with a harsh response.