Etsy Earnings: Attractive Valuation, but Marketplace's Return to Growth Hangs on Macroenvironment

Our confidence on wide-moat Etsy's long-term prospects remains largely unchanged despite mixed first-quarter earnings, but the firm's sensitivity to a very discretionary category mix—home decor, apparel, jewelry, gifts, toys and games, and crafts—suggests that an inflection in gross merchandise sales growth is likely to be macro-driven rather than company-specific. More concretely, we expect to lower our five-year sales and operating income cumulative annual growth rates to 16% and 27% from 18% and 30%, respectively, with pressure on consumer discretionary income looking set to extend a demand recovery well into 2024—consistent with Morningstar's department forecast for just 1.4% growth in real U.S. consumption spending in that year. On balance, we anticipate lowering our $167 fair value estimate by a low-single-digit percentage, leaving shares trading at a substantial discount to our intrinsic valuation.