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Best Stocks for 2018: Etsy’s Turnaround Strategy Builds Momentum

Tracey Ryniec

Editor’s note: This column is part of our Best Stocks for 2018 contest. Tracey Ryniec’s pick for the contest is Etsy (NASDAQ:ETSY).

Etsy’s (NASDAQ:ETSY) new management team is wasting no time in rolling out new ideas towards achieving its four key initiatives strategy.

On June 14, the company announced it was raising its seller transaction fee and launching new subscription packages, both of which were cheered by analysts and Wall Street.

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Higher Fees = Higher Revenue

Starting July 16, the transaction fee that is charged when a seller makes a sale will jump to 5% from 3.5%, and it will also be applied to the cost of shipping.

While you can expect some sellers to gripe about the increase, of course, it also shows that Etsy has pricing power. It knows that sellers prefer to be on its platform versus, say, Amazon Handmade.

To soften the blow of higher fees, Etsy is vowing to spend more on the platform, including increasing direct marketing by 40%. The increased marketing spending should mean higher sales for sellers, who can therefore afford to more easily absorb the higher fees.

Higher sales = happy sellers.

Etsy’s New Premium Subscription Plans

Additionally, in mid-July, sellers can buy into a monthly subscription plan called Etsy Plus, for just $10 a month, which provides more services than the standard Etsy package.

Sellers are getting more sophisticated and need sophisticated tools to handle the business. The platform that provides it to them will see the growth.

A second premium plan, Etsy Premium, is expected to launch in 2019. A price for the Premium has not yet been revealed.

Here is the breakdown of the three plans from Etsy’s press release:

Etsy Standard Etsy Plus
Available July 2018 Etsy Premium
Available 2019

• Access to the nearly 35 million active buyers in Etsy’s marketplace

• All the seller tools and services Etsy currently offers that help creative entrepreneurs start, manage, and grow a business

• Access to everything in Etsy Standard

• Advanced shop customization options

• Targeted restock notifications

• Discounts on branded packaging and promotional materials

• Free or discounted custom web addresses

• $5 monthly Promoted Listing credit and 15 free monthly listing credits

• Access to everything in Etsy Standard and Etsy Plus

• Advanced management tools specifically designed for business owners with employees

• Premium customer support

• More details to be announced in the coming months

Subscription services are great at smoothing out revenue ups and downs, especially as so much business is generated around the holiday season.

Raised Guidance Again

Etsy was already bullish about 2018 in May when it reported its first-quarter results. But it raised guidance again.

Gross merchandise sales (“GMS”) is now expected in the range of 16%-19% versus prior guidance of 16%-18%. Revenue growth has now jumped to growth of 32%-34% from May’s prior guidance of 22%-24%.

Another EPS Beat in Q1

On May 8, Etsy reported its first-quarter results and continued to see improvement. GMS was up 19.8%. It was its third consecutive quarter of GMS acceleration. Revenue rose 24.8%.

It made progress on its four key initiatives of the turnaround:

Improving Trust & Reliability: It launched several product enhancements including a new guest checkout on mobile web. Enhancing Search & Discovery: It improved context-specific ranking. Building World-Class Marketing Capabilities: It launched Targeted Offers to allow sellers to offer discounts and coupons to buyers who have added items to their cart. Providing Best-In-Class seller tools and services: It launched an order management experience to help sellers fulfill orders more accurately and better manage inventory.

Estimates for 2018 and 2019 Jump Higher

After a solid first quarter report and then the transaction fee increase announcement, the analysts moved to raise both 2018 and 2019 estimates.

The 2018 Zacks Consensus Estimate jumped to 50 cents from 36 cents over the last 90 days as five estimates were revised higher.

Etsy made 38 cents in 2017 so it’s earnings growth of 31.6%.

2019 looks equally bullish. Five estimates have been revised in the last month, pushing up the 2019 Zacks Consensus Estimate to 66 cents from 57 cents. That’s another 31.4% earnings growth.

You can see the turnaround in the earnings on the five-year price and consensus chart.

Amazon Who?

Etsy continues to cash in on the power of its platform. It’s the oldest of the artist online marketplaces and despite the chaos of the last few years, it never lost favor with its sellers.

Over 50 million unique SKUs are now sold on the site. Customers know, and trust, the Etsy name for unique goods. It’s a powerful combination that Etsy is only just beginning to tap into.

And while Amazon launched Amazon Handmade last year, Etsy’s ability to raise transaction fees seems to indicate that it hasn’t yet eaten into its dominant market share.

Shares Soar as the Turnaround Picks Up Steam

Obviously, the shares are up big since the beginning of the year, easily beating the S&P 500 in the first six months of the year.

It’s no longer a diamond in the rough, ignored by Wall Street. It now trades with a forward P/E of 84, but this is a future growth story, not a value stock.

With earnings expected to grow at double digit rates this year and next, the analysts believe there’s still plenty of future upside.

Investors should add to their positions on any weakness in the shares.

Tracey Ryniec is an Equity Strategist and Portfolio Manager at Zacks Investment Research. She manages the Insider Trader and Value Investor services. As of this writing, she did not own shares of any of the aforementioned securities.

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