Etsy Bets on Buying Back Its Stock: A Mixed Signal for Investors

Online specialty marketplace Etsy appears to view its stock as undervalued, as suggested by its latest financial disclosures. During a recent earnings announcement, Etsy's management shared that the company has repurchased $100 million of its stock in the previous quarter, indicating a significant shift towards prioritizing shareholder returns through buybacks.

Capital Allocation Shift

Etsy operates a capital-efficient business model focused on connecting buyers with sellers, thus bypassing the hefty costs associated with maintaining inventory and handling fulfillment. This approach has led to a strong free cash flow performance, with upwards of $600 million generated in the last three fiscal years alone.

The key departure in Etsy's strategy is the increased emphasis on returning this cash to shareholders. The company's CFO, Rachel Glaser, highlighted this new direction, stating that a larger proportion of free cash flow will now be intentionally directed towards share repurchases, with the timing dependent on the stock's valuation relative to its perceived fair value.

Valuation Matters

Etsy's valuation has faced a notable adjustment, currently sitting at around 3.6 times annual sales — a low not seen since the pandemic's peak turbulence and not far off from that of eBay, a more mature and slower-growing counterpart. Despite this, Etsy's flat transaction volumes over the last two years signal a difficulty in adding value for merchants. Furthermore, even though the platform's buyer base is increasing faster than eBay's, recent growth figures are not particularly strong, especially when compared to the boom experienced during the pandemic's early days.

Cautious Outlook

Despite improvements — including a doubled buyer pool, heightened average spending, and greater buyer retention — Etsy's dramatic pandemic-related growth may have borrowed from future years. Therefore, until the company demonstrates enduring transaction volume growth, investors may remain on the sidelines. Other e-commerce players like Shopify are capturing attention with robust revenue predictions, overshadowing Etsy's current investment appeal.

Etsy's strong financial health and potential for profitability are positive signs, providing management with options to reinvest in the business or continue bolstering shareholder returns. However, these factors alone may not be sufficient to persuade the majority of investors to follow in management's footsteps and purchase Etsy shares at this stage, without clearer indicators of sustained momentum.

Etsy, Investment, Shares