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Etsy's 3 Underrated Growth Drivers in Q3 2021

Etsy (NASDAQ: ETSY), an online marketplace for vintage and handmade goods, reported another quarter of solid earnings last week. The value of merchandise sold on the platform and resulting revenue for the company both increased 18% year over year to $3.1 billion and $532 million, respectively, during the third quarter. This was in spite of lapping an exceptionally strong period last year when e-commerce boomed during the early stages of the pandemic -- including hundreds of millions of dollars of face masks sold by merchants on Etsy's platform. Excluding the face-mask sales last year, gross merchandise sales (GMS) increased 24%.

While Etsy will continue to lap its pandemic-era boom for a few more quarters, this is still very much a high-growth e-commerce story in the making. Here are three overlooked drivers of the company's continued success.

Someone in an office with art on the wall using a tablet.

Image source: Getty Images.

1. New buyers keep seeking out unique items

Creating a fun, engaging shopping experience for customers is one of the key pillars to Etsy's growth strategy. The company is continuously making improvements to its site and app to keep shoppers engaged through initiatives like personalized item recommendations. But the very nature of Etsy's niche -- to help craftspeople and small businesses sell their unique wares and interact directly with their patrons -- gives its marketplace that "shopper excitement" factor. Active buyers increased 38% to nearly 96 million during the quarter, and active sellers grew 103% to 7.5 million.

Not all of these new buyers and sellers are exclusive to Etsy. The company revealed Etsy.com's unique buyers numbered over 89 million, and active sellers came out to 5.2 million. That means the remaining users are on the company's music equipment marketplace Reverb, as well as on recent marketplace acquisitions Elo7 (the "Etsy of Brazil") and Depop (a used fashion reseller popular among younger shoppers). Etsy is looking to apply the same template of success from its core marketplace to these new e-commerce categories, which should help the company sustain its user growth for years to come.

2. Advertising revenue is on the rise

Etsy primarily makes money by earning a small item listing fee and taking a percentage of a sale whenever a merchant item is purchased. But merchandise sold isn't the only driver of revenue. After the increase in GMS, advertising was the second-biggest driver of growth in the third quarter, increasing 28% year over year.

The company is using technology like machine learning to increase the relevancy of these ads to shoppers, which in turn generates better advertising yield for the merchants and craftspeople marketing their products. This segment has big potential for Etsy as it improves its ad platform and extends what it learns to its other marketplaces Elo7 and Depop in the coming years.

3. Helping increase the chance of repeat purchases

Etsy has been adding plenty of buyers to its platform in the last two years, but keeping those buyers engaged is critical. There has been good progress made getting many of these shoppers to come back again. Those who made two purchases in the last 12 months increased 35% year over year to 36 million last quarter. Even better, habitual buyers (six or more purchases and at least $200 worth of items) increased 65% to nearly eight million.

Aforementioned efforts to make Etsy more engaging and fun to use has helped with these metrics, but order shipping reliability has also helped promote repeat purchases too. In fact, helping pair merchants up with the right supply chain tools has helped decrease late deliveries for U.S.-based purchases by 50% since the start of 2021. Given all the talk of shipping delays and severe supply chain problems right now, this is a significant accomplishment. Further improvement here will no doubt raise Etsy as a top-of-mind e-commerce option among shoppers and drive even more repeat buying.

At the midpoint of fourth-quarter revenue guidance, Etsy is expecting 10% year-over-year growth to a range of $660 million to $690 million -- all the while maintaining an adjusted EBITDA profit margin of about 26%. Given the epic holiday shopping season the company experienced last year (when revenue increased 129%), this is pretty good progress. Etsy has all sorts of growth drivers at its disposal and still looks like a great e-commerce play for the long haul.

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Nicholas Rossolillo owns shares of Etsy. The Motley Fool owns shares of and recommends Etsy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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