Motley Fool Hidden Gems Investing - Etsy's "Jedi Mind Trick"

Episode Date: February 23, 2023

There's a lot of three-year comparisons getting thrown around. Is that what investors should focus on? (1:00) Dylan Lewis and Tim Beyers discuss: - Etsy's short-term and long-term story. - The growth levers for Etsy moving forward. - The trends picking up Nvidia and the hype baked into its rally. - One shiny, distraction for investors watching the chipmaker. Plus, (19:02) Maya Lau, host of the podcast "Other People's Pockets" joins Sierra Baldwin to discuss her new show and what she's learned from having conversations about salary, economic class, and careers. Companies discussed: ETSY, NVDA Host: Dylan Lewis Guests: Tim Beyers, Sierra Baldwin, Maya Lau Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks, Annie Franks Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder?

I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. AI means big business for NVIDIA and Etsy sellers keep selling. Motley Fool money starts now. I'm Dylan Lewis sitting in for Chris Hill and I'm joined by half man, half caffeine,

Tim Byers. Tim, how's it going? That is factually correct, Dylan, and I am thankful that you got that out of the way. I'm always thinking about the guest, trying to get us right into it. Excited that you're caffeinated, I am too. Earnings season keeps rolling. We have a lot to dig into. We have some names that are very familiar, two Fools. Today, we're going to be talking about, to tease a little bit, one of the best-performing stocks of the past decade and a company in my portfolio. I'm going to make you wait for the best-performing stock in the last decade or one of the best-performing stocks in the last decade and first turn the focus over to myself, Tim, and then what I own.

Etsy reported, this is a company that I own and one that I think a lot of Fools own, and a company that has been going through a bit of an interesting period over the last couple of years. I think that's a kind and thoughtful way to think about it. If you read the Etsy earnings release, Dylan, what you will see is the earnings equivalent of a Jedi mind trick. These aren't the last three years you're looking for. You should go back to 2019. There's a lot of mention of three-year comparables in the press release.

So, for example, they will say, consolidated gross merchandise sales of $4 billion, that was down 4% year-over-year and down 0.7% on a currency-neutral basis. But it was up over 145% on a three-year basis. And I think what's interesting about this, Dylan, and why we should pay attention to it, is Etsy is trying to establish that they have returned to normal, that 2019 was normal, and now 2023 is normal. So the way you should be thinking about Etsy's business is take 2019, slap some growth on it, and now think about that level as where Etsy should be. So, your question as an investor should be, is that fair? And if it is, then what does normal

Etsy look like? Because otherwise, and I know we can get into more numbers, I'll pause there, Dylan, but some of the other numbers are not that great. Yeah, I think one of the interesting things with this quarter is the company posted just over $800 million in revenue. It came in ahead of estimates. We saw a little bit of disappointment on the earnings per share number. But if you get beyond the estimates and you look at some of those year-over-year numbers, we're talking about a company that grew the top line at 12% year-over-year. And really, you mentioned before that gross merchandise sales was down year-over-year. That increase that we're seeing in revenue is more attributable to things like their fees and what they're doing on

advertising side, not so much the activity that's happening on their platform. Right. They've gotten a lot of blowback for those fees. They had an increase earlier in 2022, and there were some sellers, which they've done many, many times before, where they said, that's it, we're taking a break for a certain period of time. I think this latest boycott was on the order of a week to protest the fee increase. To be fair, Etsy's take rate in terms of what it takes from sellers across all of those merchandise sales to feed its own coffers is not enormous, but they do keep raising it, which makes it harder. As an Etsy seller, when the take rate goes up, it does make it harder as an Etsy seller to earn profit on your sales. So, I can understand

why they are pushing back on this. But it does say something to me that both on a quarter-over-quarter basis and on a year-over-year basis, those gross merchandise sales were down 4% year-over-year in the quarter, 1.3% down for the full year. Now, there's a lot of business being done on it. $13.3 billion in 2022 versus $13.5 billion in 2021. So, what does the healthy Etsy thesis look like? If you go back to 2019 and you look at where this business is going today, theoretically, Dylan, this is going to have to shift. Some more of that Etsy revenue is going to have to come from gross merchandise sales. So, in terms of guidance, that's what we should be looking for. And yet, according to these numbers so far, we're not really seeing that.

Yeah. You mentioned the seller perspective there, where I think the take rate is about 20%, that was up, I think, 300 basis points year-over-year. And there's a natural limit on how much sellers will expect. As a shareholder of the company, I don't want to see that being the only thing that's really driving growth for them either, because it's a lever, but it's a lever that really has a natural limit. Right. So, the kind of things that don't want to see. So again, if we're going to buy this thesis of Etsy as 2019 was normal, 2023 will be more normal, things that we don't want to see are like active sellers being down just under 1% year over year in both the quarter and for the year. But that's what happened.

The active buyer base down 1.3% for the quarter and down 1.3% also for the year. really those aren't great numbers so what i want to hear from etsy and i don't to be fair i haven't gone through the call to really understand this but let me tell you what i'm looking for in 2023 i'm looking for how management is pulling levers to get more sellers onto the platform and more buyers onto the platform because the sustainable etsy is one that is a much bigger marketplace. If you're expecting as an investor, Dylan, for this company to compound, you want the marketplace to be bigger, much bigger, more buyers and more sellers, more than anything else. That's probably going to drive growth here. And right now, those trends are in reverse.

One of the things I wanted to ask you about, Tim, was I want to give the company some grace, because we did see basically a 3X in their top line over the course of three years, which is incredible, and that's a big transformation. The story of, look at us on a three-year comp is one that Etsy is trying to convince the market of, but they're not the only company that I think is trying to make that comparison. I think a lot of growth companies are trying to tell that story right now. When do you say, this is something I'm willing to lend this company, and when do you say, you know what, I'm going to stick to the year-over-year comps and hold them accountable to what we've been seeing, and maybe would judge a company on more traditionally?

I think that's a really good question. I think I give them more grace when the valuation gets better and gets cheaper. The stock is down slightly today, not by that much. It's about 1.5% the last time I looked, Dylan. But overall, the free cash flow for this business in the last fiscal year was, according to my calculations, about $415 million. So that puts the present value, the free cash flow yield for this company at about 2.5%, about 2.4%, which is pretty good, but it's also not amazing. It certainly doesn't make Etsy look cheap to me. So when do I give them more grace? I'm probably a holder here, to be honest with you. If I held shares, I would be holding and waiting for more management guidance on how they make that

marketplace bigger. When I'm willing to pay more of a premium is when I see those key performance indicators really starting to grow and grow consistently, grow on a trend line. So when gross merchandise sales is starting to move up and to the right, and even more importantly, when active sellers and active buyers, like here would be a really interesting indicator, Dylan, that would be a strong signal to me, where if the valuation hadn't changed too much, but these indicators were pointing directionally correct, where I'd be very interested in a buyer. When I see growth in active buyers and active sellers outpace growth in gross merchandise sales, if those two things are growing faster than gross merchandise sales, that tells me there's a leading

indicator happening here. The marketplace is growing bigger, and the pie is probably going to start accelerating in growth, like, okay, I'm interested. If the valuation hasn't run away from it at that point, I'm starting to rub my hands and get interested. Tim, as a shareholder, I would love to see it. Let's hope it happens. I'm right there with you. Another company that has gone through a bit of a transformational couple of years is Nvidia. It's been an incredible performer. It is a company that a lot of Fools own and follow. It has basically picked a tech trend and it has ridden that trend over the last couple of years. The company is up 10% today after posting a top and bottom line

beat this quarter. Revenue came in at $6 billion for the fiscal fourth quarter and EPS at $0.88, both edging out estimates. We also saw what looked like a pretty strong forecast from the company as well. Tim, what jumps out to you looking at the report from Nvidia? Well, it's interesting. I mean, this looks like one where maybe two things are at play. One might be that we had expected a lot less from NVIDIA than we should have. But the other, and this is the thing that scares me a little bit, this is another company that I like, that I have been on the recommending end of in multiple services. So I do like the company a lot. I don't think the valuation is all that cheap, Dylan. So, I wonder how much of this is, oh, boy,

NVIDIA is going to be supplying AI as a service to a bunch of cloud companies. Look out, this thing's going to the moon. I wonder how much of that is tied into some of the share price today, because the numbers, let's be honest, were not amazing. Let's hit a couple things here. So, just about, of the market platforms is what NVIDIA calls them. There are six of them. Four of them were down and down significantly in the fourth quarter. And honestly, year over year, gaming was down 46%. Professional visualization down 65%.

OEM and other down 56%. sorry, there are five, not six. So, three of the five down. Automotive was up 135%. And then the biggest one, data center, was up 11%. So, the numbers are not amazing. Here's the thing that's happening. NVIDIA is in a transition. And in this last quarter, in the fourth quarter, NVIDIA basically generated more than twice the revenue in data center than it did in gaming, which is a real switch. From years ago, gaming was the business and data center was this minority portion. Now, NVIDIA chips, particularly those graphics processor units, which just are, you know, you can think of those as like the V12 engines

of semiconductor, you know, large chipsets for large scale processing. Those things are just massive. They do a lot of parallel processing. And so they're very useful in data centers And that's becoming quite apparent. But the transition, Dylan, is going to be when does the gaming sector, which to your point, when the gaming sector was gangbusters, guess what was happening? There were lots of people who were doing Bitcoin mining, buying external GPUs, putting them into systems and saying, go get me some Bitcoin because I want to be rich. And it was the gold rush, Tim. It was the gold rush. And so that sector has been subject to that over and over and over again. And now it's on the downswing. And so I think

part of the hope is like the rush to AI will be like, oh, OK, there's going to be a lot of buying of those, you know, external a you know, those external GPU cards. And here we go. That gaming sector is going to recover. It's too early to say that. It's far too early to say that, but this business is healthy. It's just in transition. You anticipated a question that I was going to get to, and I think I might just ask it anyway, because I think our listeners are probably looking for a specific take on this, Tim. Every headline that I saw related to NVIDIA's earnings name-checked AI. It seems like you mentioned the crypto boom before and the way that's affected this company. How do you think about the business versus these trends and

tailwinds that seem to just pick it up every couple of years? Because name something that's been big in tech, NVIDIA has been at the intersection of it the last couple of years. It's true. Dylan, I'll just be honest with you here, I hate this. I'm just going to give a hat tip to our coworker, Seth Jason, on this, who is much smarter about AI than I am, because he runs our AI service. He's made the point that there has been functional AI around for a really long time. It's just not the generative AI, which is chat GPT. It's been more machine learning, and that is highly useful and under the hood, and you don't really see it, and that's the good part about it. I hate seeing in the NVIDIA call so many mentions of AI because

that means that there's probably some hype baked into this rally right now that is not going to be backed up by numbers, probably not for a while. So, yeah, you're right. I mean, they're getting some tailwind here. I'm going to go ahead and say some of that tailwind is undeserved. having said that that doesn't mean that nvidia is a bad business it just means that don't get distracted by the shiny thing focus on the fact that nvidia is a wonderful supplier of chips to data centers around the world and that business is not going away you don't need to have ai workloads everywhere for NVIDIA to sell a boatload of chips into the data center segment. So, just please be careful. This is not a screaming AI play. That's just nonsense.

That's a sober and, I think, really great look at that, Tim. I think it's a reminder. It's so easy for us to get carried away when we see a company has exposure to something that is blowing up. Just looking at comments that management has made, NVIDIA's CEO was talking about open AI and chat GTT and said that this is the iPhone moment for AI because it is something finally that consumers can wrap their heads around as investors. We got to take that step back sometimes. You know what? That comment from Jensen Wong, you can look at that comment two ways. You could say, wow, it's an iPhone moment. Holy moly, that's amazing. And expect that things are going to go to the moon tomorrow. Or you could look at

the actual history of the iPhone and how long it took for the iPhone to become like, how long did it take for the iPhone to become, and really the App Store, to become the central piece of the mobile ecosystem that it is today? It took many years. Let's just remember here, for context, the original iPhone, I kid you not, in order to do mapping in the original iPhone, Dylan, I don't know if you remember this. They didn't have a GPS. Do you remember what they were using to render maps in the original iPhone? I didn't have an iPhone until the iPhone 3 or 4. I was behind the curve on that one. It was Wi-Fi hotspots. That's what it was. There was no GPS chip in the original iPhone. There was a lot of incremental innovation that had to happen

before the iPhone really became the iPhone. So if you take Jensen Wong at his word, which you can, that's perfectly fine. Just take it in the historical context and say, I get it. All right. Let's remember that ChatGPT is a toddler and does things badly and will get better. So listeners, remember, we are in the Wi-Fi hotspot era of artificial intelligence. there's a long ways to go. Tim, thank you so much for the reminder, and thank you for joining me. Thanks, Dylan. How much money do you make? What class are you in? Do those questions make you a little uncomfortable? Maya Lau is a former investigative reporter for the Los Angeles Times and the host

of the new podcast, Other People's Pockets, a show about other people's money. Sierra Baldwin caught up with Loud to discuss her new show and the obstacles to talking about money. Before we dive into your show and talk about other people's money, I actually want to flip the script a little bit and ask you, what is your relationship with money? Yeah, my relationship with money is complicated and has changed a lot over time. I was a newspaper reporter for many years and an investigative reporter, and I started to get really frustrated about money in terms of my income. Obviously, most people know newspaper reporters don't get paid that much, and I always knew

that going in, and I was fine with that. But over time, as I had a kid and started to get a little bit older, not that I'm super old. I'm 37. But you know, I started to want the things that people want, like owning a house one day and having more stability. And I started to get really frustrated. And I found myself in my personal life, just asking a lot of questions about money and wondering things about my friends who had maybe purchased homes or were doing things I wanted to do. And I started to get really curious and want to just ask people directly, like, how much do you make? Or how did you make that work? How did you make this purchase? So I think my relationship has changed over time. I

mean, I definitely would call myself somewhat of a do-gooder or think I want to make a positive impact on the world. Definitely out of college, wanted to work for nonprofits or definitely was not after money. And I think that now I'm okay with saying that I want to make a decent amount of money. I don't want to become a billionaire, but I would be fine with making several hundred thousand dollars a year. And like that to me, as of a few years ago, would feel kind of weird to say. So yeah, it's definitely changed. And I think I've become a bit more open about my desires. So that seems to be a big theme of your show. And when you're talking to people is really learning what makes them tick and what motivates them when it comes to money and making money and choosing

their career pathway. And you actually talked to a nuclear physicist who got his PhD, but then could barely get by and ended up pivoting a bit and choosing a career path that provides a little bit more of a lucrative and secure future for his family. Can you talk a little bit about your conversation with him and some of the takeaways that you had? Yeah. So I talked to Dr. Liam Dodd, who was a nuclear physicist. He worked at some of the world's most prestigious institutions in that line of work, but even so was not paid very much and was literally homeless, was couch surfing, was eating like cheese sandwiches and barely able to feed himself. And he ended up making a transition into a much more traditional

career in used auto sales, actually, but still working with data. And he's still a scientist. But that was an interesting interview because it really highlighted the fact that your dream job or your passion can be a trap. Like he – physics is his passion. It's like loving art to him or music. I mean it really is the language he wants to live and breathe all the time. But most of the people that can can be true physicists their whole lives, like he found that they had family money or, you know, there was some other reason why they were able to get by or they got a super hard to get professorship or something like that. And so I think that it just illustrated and I've kind of found that in my own life that this thing that you might think of as your dream job. Sometimes it can be a trap because when you're in that dream job, you don't feel empowered to

speak up about pay, about getting paid more. You feel lucky to just to even be able to have your dream job. You tell yourself that other people would die for your job. And so, you know, aren't you lucky? And I think that realizing that for some people, there might be an afterword to that. There might be something that comes after that that you never would expect. And sometimes leaving your dream job can be really freeing because you never it's something you never would expect to do. And surprising yourself is really important. And that physicist I talked to, I think he's really happy now. You know, he's really stable and like he has better quality of life. I think that is a dilemma that we all face is whether we should chase our passion or, you

know, if it has a lower income potential or chase the money. Is there is there anyone that you've spoken to for the first season of the show or who's coming up, who is following a passion? Maybe it has a lower income potential and they've acknowledged that, but they're comfortable with it. And if so, what did you learn from them? I'm trying to think of if someone who has a lower... Well, okay. So I talked to a chef who has one of the best restaurants in the world. It's considered, quote unquote, fine dining, although he does not like that term because it connotes like white table cloths and foie gras, which is very much not his restaurant.

But he he's absolutely following his passion. This is a joy for him, even though it is so much work and he doesn't make that much money off of it. He's fine with it, though. You know, one of the interesting things about the show is that, like, I'm interested in this idea of jobs that seem really prestigious and are really prestigious, yet don't generate that much money. And I think that being a chef can be one of them. I mean, he's super celebrated, but the amount of money he makes on the restaurant is like, I mean, he in total makes between 100,000

to 200,000 Australian dollars a year. And most of it is actually from his paid ad promos, like on Instagram, not from the restaurant. So yeah, I think that there's, there are a lot of people I've spoken to who their passion is just there. You're never going to like break them away from it and they really are okay with making what they make. And for him, like the question of what is enough is like absolutely about his family and his mental health and getting to do what he loves. So he doesn't feel like he's lacking in any way. You also talked to a television writer, an astrologer, I think, and an influencer, journalist, young entrepreneur. Would you say that there's something that they all have in common when it comes to attitudes toward money?

I think that most people have shared that money is uncomfortable for them to talk about. And, you know, on the show, I ask people directly, how much money do you make? What's your net worth? Things like that. The questions that we all wonder, but few of us feel really okay directly asking people. And most of them, you know, have some shame or just have some discomfort around money. they sometimes can't even articulate why, like, why does this feel so weird to talk about? It's kind of like talking about sex or something like, like, I've never talked about this on a

podcast before. But we talked through like, why do you think it's uncomfortable? And, you know, I think a lot of it comes from childhood, how money was talked about in your family, there's sort of a recurring idea of, if you don't have a lot of money, or you don't have what you think is enough money that you feel shame because society tells you that it's a personal failure. It's a character flaw. You should have figured it out. You were too stupid to not figure it out when really none of that is true. So that is something that keeps coming around again and again. You mentioned that asking people about what socioeconomic class they think they're in. You mentioned that that was kind of one of the tough questions or ones that had a little bit

of a harder time responding to why do you think that is? Yeah. So I wouldn't say it's with all guests. I mean, most guests actually do answer that freely. You know, we actually did an episode that will come out that is taking a step back after we've done some episodes and talking with an expert on class issues and money issues and kind of chewing on like, okay, so this person, you know, not naming names, but like these themes came up, like, what is that about? And I asked her that. And she said that often when people have changed classes, either they've gone up or down, there's a real like identity shift. It's very hard for people to accept. Or it's just, it's just odd. Like even if you come from a working class background when you're a child, and now you're say upper middle class, like some people just have a hard time. it's like they don't want to betray their working class roots like they feel like they're working class like that those are their people like those are their values like saying that their

upper middle class makes them feel like an ass or something you know stuff like that and then sometimes I guess tied to their profession or like just not wanting like the wider world to think of them a certain way I'm not sure but it is it is a really puzzling but interesting thing And that's exactly why, like, I love to have these conversations because it's like, huh, like, you know, why? Why is that? As always, people on the program may own stocks discussed on the show and The Motley Fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. We'll see you tomorrow.