Etsy Stock Gains Big as It Beats Revenue and Earnings Estimates in Q2 of 2022

Etsy (NASDAQ: ETSY) announced its second-quarter results after the market close on July 27 and reported revenue of $585.1 million with adjusted earnings per share of $0.51.

Analysts forecast Etsy to report revenue of $556 million and adjusted earnings of $0.34 per share in Q2. In the year-ago period, Etsy's sales stood at $528.9 million while adjusted EPS was $0.68. So, Etsy increased revenue by 10.6% while its adjusted earnings slumped by more than 20% year-over-year in Q2. 

Further, Etsy forecast sales between $540 million and $575 million in Q3 compared to Wall Street estimates of $570.27 million. The company expects gross merchandise volume between $2.8 billion and $3 billion with an adjusted EBITDA margin of 26% in the September quarter. 

Let's see what impacted Etsy's performance in Q2. 

Etsy stock has underperformed the market in 2022

Despite the recent uptick in Etsy stock, the e-commerce giant has underperformed the broader markets year-to-date. In the first seven months of 2022, Etsy's stock price declined by 56%. Additionally, Etsy stock is also trading 65% below all-time highs. So, will Etsy continue to disappoint investors for the foreseeable future?

During the earnings call, Etsy CEO Josh Silverman stated that Q2 results reflect Etsy has maintained most of its pandemic gains, allowing it to deliver strong bottom line performance. 

Despite facing a challenging macro environment, Etsy is well-poised to unlock enormous opportunities over the long term. 

Etsy emphasized that seller ad budgets surged 80% in 2022, and Etsy ads continue to scale rapidly, allowing sellers to invest in their own growth. In the last five years, Etsy's ads revenue growth surged by 516% and is a crucial driver of revenue growth. 

Etsy continues to focus on product development and spent $102 million or 17% of sales in Q2 to enhance platform features. In 2021 product development expenses accounted for just 12% of revenue. A robust e-commerce platform will enable Etsy to attract buyers and sellers, widening its ecosystem at a solid pace over time. 

What is the forecast for Etsy stock?

Etsy is expected to grapple with several short-term tailwinds, including inflation, consumer discretionary spending patterns, retail store reopenings, and supply chain disruptions. 

To offset the deceleration in revenue growth, Etsy aims to lower marketing spending in 2022. It spent $164 million in marketing in Q2, accounting for 28% of sales, much lower than its year-ago figure of 32%. 

Further, Etsy's capital-light business allowed it to generate an operating cash flow of $125.8 million in Q2. It also ended the quarter with a cash balance of $1.1 billion, providing Etsy with enough room to reinvest in capital expenditures and acquisitions. 

Given consensus forecasts, Etsy stock is valued at 5x forward sales and 45x forward earnings, which is steep. But analysts have a 12-month average price target of $117 for Etsy stock which is 20% above its current share price.