1 Ultra-Important Metric Etsy Shareholders Need to Know
People spending longer than usual at home during the worst of the pandemic, Etsy (ETSY -1.14%) greatly benefited. Consumers have turned to e-commerce merchants not only for things like face masks, but also for other products like home furnishings and clothing. And Etsy’s unique, handcrafted offerings were in high demand with customers.
Despite year-over-year revenue growth of 5.2% in the first quarter, a sharp deceleration from previous quarters, Etsy proved to be a slot machine, generating positive revenue free movement of capital (FCF) on a regular basis. In an uncertain economic environment, such as the one in which the United States currently finds itself, investors should look for companies that have an excellent financial profile.
Etsy’s stock may be down 62% in the past year, but the company still has a bright and profitable future.
Etsy operates a low-cap business model
Because Etsy has no inventory and is content to connect buyers and sellers on its various marketplaces (Etsy, Reverb, Depop, Elo7), its business model scales extremely well and is very profitable. After fundamental investments in building the technology infrastructure, for marketing to attract more users (there are 95.1 million active buyers and 7.7 million active sellers today) and general functions of the business, the additional revenue generates very high margins.
As a result, Etsy operating margin experienced significant growth from 5.1% in 2016 to 21.6% in 2021. Furthermore, with low capital requirements for purchases of property, plant and equipment and for the development of software for internal use, representing 1, 6% of revenue in Q1, the company is sustainably FCF positive. In 2020 and 2021, it produced $1.3 billion in total FCF (excluding cash paid for acquisitions) on combined revenues of $4.1 billion. It is the mark of an exceptional company.
Free cash flow is an unquestionably important metric that investors should monitor to assess a company’s performance. Indeed, the ultimate goal of any for-profit business is to generate money. At this point in its life cycle, a company does not need to raise external financing in the form of equity or debt, generally viewed negatively by the market, and may even begin to return capital to shareholders in the form of dividends. and redemptions. In fact, over the past 21 quarters, Etsy has repurchased $1.2 billion worth of stock.
If investors believe that Etsy will generate more FCF in five or ten years than it does today, then the stock price will almost certainly be higher in the future. As I touched on earlier, Etsy’s stock has fallen significantly over the past 12 months, and it now bears a price/earnings ratio of just over 26 (the lowest in company history) and a price-to-sales ratio of 5 (almost the lowest ever).
Unlike many other high-growth tech stocks that have crashed recently, Etsy actually makes money in the form of hard cash. If the Federal Reserve’s tight monetary policy causes a near-term recession, investors will be happy to own this premier online market. It should be able to withstand whatever the economy throws at it.