Company: Etsy, Inc.
Ticker: ETSY
Previous Close: $155.03 (12/4)
Industry: E-Commerce
Short-term: Buy
Middle-term: Buy
Long-term: Hold
Overview:
As the holiday season slowly creeps upon us, people are looking to spend hard-earned money on their family, friends, and loved ones altogether. Etsy, Inc. operates an online marketplace connecting millions of buyers and sellers across six major markets (the United States, the United Kingdom, Canada, Germany, France, and Australia). Etsy prides itself on the uniqueness of the products (the word “unique” being mentioned nearly 40 times in their 10-K) sold by the artisans registered on its platform. This is a key component that separates Etsy from the likes of Amazon and other online sellers that offer every-day goods and tangibles. With 2.7 million sellers and 46.4 million active buyers in 2019 alone, Etsy has been able to establish themselves and maintain a considerable market share of the sector. Etsy offers pricing models that are based on the volume and the value of the merchandise being sold. According to Arriana O’Dell of INC.com, Etsy sellers have fewer hoops to jump through as they do not need UPC codes and typically will have lower fees than if they were to sell with other companies such as Amazon. Etsy charges a $0.20 listing fee per item, 5% commission on items sold, and advertising fees when necessary. Objectively speaking, this is an interesting business model that gives Etsy the ability to make more revenue when their services are used, but it does not create safer streams of revenue in terms of the profits and growth of small businesses and independent persons when compared to them using a traditional subscription model. This high-risk, high-reward system can only operate efficiently if the company can sustain and grow both revenues and profits in the coming years.
Why the Hype?
Two major economic shifts are adding fuel to the blazing fire that is Etsy’s operations: the side hustle/gig economy and global quarantine orders. Naturally, people have looked before for multiple streams of income; however, now it seems that people are flocking to alternative forms of income to either supplement their jobs or even to replace them entirely. This trend started to gain major global traction with the rise of ridesharing and has now transformed into online selling. People with enough spare time and a burning entrepreneurial spirit essentially turned their free time into paid time. With these major economic shifts and the pandemic of COVID-19 having influenced the world since March, people have had more free time, albeit of no intent of their own, and more of an incentive to make money with the strain of working from home for reduced wages, being furloughed, or even having been fired altogether from their regular 9 to 5. The onset of pandemic lockdowns also created a common scenario where people had more time to work on their hobbies and had less distracting substitutes for their time. From the consumer perspective, home improvement has seen increases over the past several months as people transformed their houses into homes, spare bedrooms into offices, and having finally redone the kitchen that they had been planning on remodeling for years. This desire for updating living spaces and quarters was a byproduct of lockdowns increasing and being drawn out which, when considered for its scale throughout the aforementioned western nations, all go toward the benefit of Etsy’s business.
The Numbers:
Etsy was able to operate at a profit starting in 2017 for the first time in its history and has seen rather large recent increases in profitability since. This has been fueled by increases in revenue and gross profit year over year as is shown in its 2019 10-K. Etsy has also seen increases in its cash balances, total assets, and total net assets over the past year. As Etsy relies on the value of products purchased on its marketplace, it tracks and reports this information on its financial statements. The gross revenue sales (“GMS”) tracks the value of sales net of returns on its platforms. This metric has seen year-over-year growth of 20.8% and 26.5% in 2018 and 2019 respectively. The numbers also reveal that Etsy has experienced twice as much value as of Q3 this year than last year. The causal factor of this upward momentum and continuous growth for Etsy can be attributed to the increased number of active sellers on their platform, 3.7 million, and the number of active buyers, 69.6 million, which were well sustained throughout the first nine months of 2020. All in all, more people buying generally leads to a higher volume of goods and higher fees that Etsy can collect which further translates into revenue and growth, and that is what the numbers are showing.
Threats:
As Etsy is a marketplace, it is vulnerable to economic changes that could potentially dissuade buyers or sellers from using their services. Occurrences such as tariff increases between countries on the Etsy exchange may increase prices and reduce the number of transactions and therefore revenue for the company. It should be noted though that the pending shift toward globalist policies due to the results of the United States election could further lessen the barriers to trade which would greatly aid Etsy market participants. Speaking again to plausible threats, Etsy is vulnerable to changing buyer tastes and seller incentives. The former changes in a wanton manner, but the latter may see strategic shifts that reduce the want for individuals to use this as an avenue for supplemental income. Employers in the near-future may include clauses containing language restricting additional streams of income such as provided by Etsy and unfavorable tax laws would also serve to disincentivize sellers. These threats do not seem to be highly probable as municipalities enjoy collecting sales taxes and generally enjoy allowing more trade within their borders; yet, these are still factors that should be considered when looking to open a position with Etsy.
My Play?
Etsy has shown great promise in its ability to gain market share in the e-commerce industry with its own niche, but it does not have a dependable revenue model. This leaves it more vulnerable to drops in transaction volume than if it had a subscription model as previously mentioned. The fact that Etsy is a marketplace reduces the risks associated with carrying inventory which is a major plus. The platform has garnered massive momentum from the pandemic as many people again have seen losses of jobs and have had more free time to work on their artistic hobbies. People also have been stuck looking at the same interior decor throughout these recent times more often than usual, leading to a sensory overload and oversaturation of previous decorative tastes resulting in many of them wanting to change the layout of their homes. If this trend continues after the pandemic, Etsy can continue to see revenue, profit, and (most importantly) share price growth. I’m eager to see sales numbers from this holiday season as they may beat predictions and see share prices jump exponentially. In sum, these listed factors, attributes, and per the future outlook of the company, I plan on purchasing shares of Etsy to hold long-term, using technical analysis to find favorable entry points.
Full Disclosure: I am long in ETSY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for the writing of this article. I have no business relationship with any company whose stock is mentioned in the above article and this is not a solicitation or recommendation to purchase the stock.
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