Etsy Inc Stock Falls on Earnings, but Is the Market Missing Something?

By Motley Fool Staff Markets Fool.com

In this segment fromMarket Foolery, Mac Greer is joined byDavid Kretzmann as they discussEtsy (NASDAQ: ETSY), the e-commerce platform for handmade and craft items. The company is adding users and growing revenue but losing more money than expected (as younger tech companies often do). But due to cautious guidance, Etsy may not be getting the benefit of the doubt that it deserves.

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A full transcript follows the video.

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This video was recorded on March 1, 2016.

Mac Greer: Speaking of the company that might not be Amazon-proof, Etsy. If you don't know Etsy, it's a retailer of online crafts and all sorts of homemade good stuff, and other stuff that's not as good. Shares of Etsy -- down big on Wednesday after reporting a greater than expected loss. David, Etsy is adding users and growing revenue, but Wall Street doesn't really seem to be buying the story.

David Kretzmann: Yeah, I was actually surprised to see the market's reaction here. I think Etsy might actually be Amazon-proof. Amazon, eBay, and Alibabahave all tried to replicate what Etsy is doing, and none of them have really succeeded. At last count, Handmade by Amazon, which is something that Amazon launched about a year ago, had about 400,000 items listed on the platform. Etsy has over 40 million on its platform. So, Etsy far and away exceeds Amazon. Ebay shut down their thing, Alibaba shut down their efforts.

So, Etsy, in this corner, active sellers grew 12%, active buyers up 19%, sales up 25%. The company is free cash flow positive. They are generating cash. They have $270 million in net cash. I think the issue here, they had some wonkiness with their guidance. They actually reiterated the upper end of their guidance for the next three years or so, through 2018. They're expecting revenue to grow at an annualized pace between 23% to 25% through 2018. But for 2017, they're only expecting sales to grow 20% to 22%. So, for whatever reason, management is being a little bit softer on guidance this year, and they're essentially implying that their growth will reaccelerate in 2018. I think that's probably making Wall Street a little bit nervous. But I do like the long-term story here. What Etsy is doing, with their base of sellers, they're targeting a group that none of these other retailers are doing a good job of targeting. The majority of sellers on Etsy's platform are women who work from home, and half of them don't sell anywhere else other than Etsy, and the ones who do sell somewhere else are usually just going to craft fairs. So, when you go to Etsy, you're not really going there for something that you would otherwise be able to find on Amazon or Ebay. So I think they are carving out a sustainable niche in e-commerce. But quarter to quarter numbers will be a little bit jittery here.

Greer: I've had one Etsy experience, and it was incredibly positive. A few years ago, we went out to CES for Supernova, and a few weeks before we left, one of our copywriters said, "I need Motley Fool jester caps that have a Supernova starry theme." Where do you go for that? I go to Etsy, and sure enough, there's a woman who makes jester caps, and she did an amazing job and turned it around in a week.

Kretzmann: That's awesome.

Greer: Now, I'm not sure there's a business there.

Kretzmann: Well, maybe not jester caps specifically. The Fool can keep that seller in business. But I think that highlights the dominance, or the advantage for Etsy. You're going to Etsy for a personalizable, customizable thing. When you go to eBay or Amazon, you're usually going for the mass-produced stuff. That's their bread and butter. You have Amazon Fulfillment centers, they're just trying to churn things out as inexpensively as they can. You go to Etsy for that handmade touch. So, I think that's where they are carving out that niche. That's why I think they're here to stay. And they are generating, like I said, positive cash flow, and they have a strong balance sheet. I like the vision for the company. They're also, in April, rolling out Etsy Studio, which is focused on the makers and a DIY do-it-yourself audience. So, you'll be able to go there, you have all the listings for yarn and thread and all this stuff to make crafts on your own. They'll also have tutorial videos and things like that. What Etsy is doing, Amazon and eBay and Alibaba, like I said, they have tried to replicate it but they haven't had a whole lot of success matching Etsy's success.

Greer: So, when you say they're here to stay, do you think they're here to stay as a stand-alone company? Or, if I'm an investor in Etsy or considering Etsy, do I really have to hope that they're going to be acquired?

Kretzmann: I mean, it's a small company, so theoretically, it could be an acquisition. There haven't really been a whole lot of buyout rumors that I have come across. But I own a small position in Etsy, and I would prefer -- it is a recommendation at Rule Breakers -- it'd stay independent, because I think they can succeed as an independent company over the next three to five years. We will have volatile quarter-to-quarter results, but I think as far as that e-commerce category grows, I see Etsy being the craft fair moving online. And that's something that none of the other behemoths in e-commerce have done a good job replicating. I hope Etsy stays independent, but they are small enough that one of these companies could snap them up without a whole lot of trouble.

Mac Greer has no position in any stocks mentioned. David Kretzmann owns shares of Amazon and Etsy. The Motley Fool owns shares of and recommends Amazon, eBay, and Etsy. The Motley Fool has a disclosure policy.