Strong Fourth Quarter for Wide-Moat Etsy

Wide-moat Etsy ETSY posted strong quarterly results, with $4.2 billion in gross merchandise volume, or GMV, and $1.11 in diluted EPS healthily eclipsing our prior expectations of $4 billion and $0.90, respectively. The marketplace operator has carved out an enduring niche in a quickly evolving e-commerce space, with two-year stacked GMV growth of 154% for the quarter (down just 4 percentage points sequentially), suggesting to us that the firm's market share gains should prove enduring, a benchmark online peers have struggled to match. Though the name has traded down in lockstep with a cohort of pandemic darlings, it is our view that Etsy has emerged from the pandemic a fundamentally stronger business, with 96 million annual active buyers more than doubling 2019 levels; expanding GMV per buyer attesting to an expanded catalogue and investments in search optimization; and volume leverage driving adjusted EBITDA margins north of 30% for fiscal 2021, up 12.3% year-on-two-year. While quarterly results were impressive, our long-term outlook remains relatively unchanged, with take rate expansion and slower operating margin leverage largely offsetting--suggesting minimal changes to our $221 fair value estimate. We identify three green shoots for the quarter; sustained traction in the ever-important habitual buyer category, planned investments in international markets beyond the U.K. and Germany, and enough confidence in the marketplace value proposition to raise take rates on the Etsy marketplace from 5% to 6.5% in the second quarter of 2022. The firm anticipates channeling the bulk of incremental revenues from its rate increase (roughly $150 million, by our estimates) toward marketing and platform development, with seller tools, discovery, and international markets offering alluring opportunities. Our forecast calls for 18.5% (26.3%) average annual sales (operating profit) through 2026, with 30% operating margins continuing to look attainable in the longer term.

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