Etsy Inc.'s (ETSY, Financial) platform, along with its other two platforms, Reverb and Depop, target non-commoditized markets ranging from artisanal crafts to pre-owned musical instruments to vintage clothing. It generates commission on all sales, with the bulk of its revenue and gross merchandise volume (approximately 90%) coming from the core Etsy marketplace.
The company has grown rapidly since being founded in 2005. Ten years later in 2015, at the time of its initial public offering, Etsy had 1.4 million active sellers and 19.8 million active buyers. Today, 95 million people are shopping 7.5 million seller stores on the website and app around the world. And out of $13.3 billion in gross merchandise sold during 2022, the company took a nice cut, generating $2.56 billion in sales with a 71% gross margin.
Future expansion and strategic focus
In the decade to come, Etsy will likely continue to expand its international operations, which already make up 45% of gross merchandise volume. It will also need to invest in search and functionality features as well as buyer protection and better seller tools, including options for advertising.
The most important strategic focus will need be answering the question: "How can we increase repeat buyers?" The items bought are not prone to frequent purchases, Etsy lacks the same kind of buying pattern that products bought from Amazon.com Inc (AMZN, Financial), Target (TGT, Financial) or Walmart (WMT, Financial) command. However, Etsy's website gets a heavy amount of traffic. In fact, the website has over 465 million visits per month with 177 million unique visitors spending nearly six minutes on the site across an average of 6.59 page views. That puts it ahead of Target in the category.
Brand strength and market position
Etsy is an e-commerce company focused on handmade, vintage and creative goods. It operates an online marketplace where independent sellers can list and sell their products. This community is deeply engaged, which helps foster loyalty and repeat business.
As more sellers join Etsy and list their products, it attracts more buyers. The sellers post on social media, which continues to drive traffic. This network effect strengthens its position in the market. More importantly, the trust and brand recognition that Etsy has built over the years present significant barriers to entry for potential new competitors.
Unlike broader e-commerce platforms, Etsy's focus on niche products makes it harder for generalist platforms to compete directly. In fact, the only real competition is eBay Inc. (EBAY, Financial) and, to some extent, Shopify (SHOP, Financial); however, both occupy a different space in the minds of consumers. Etsy has managed to expand globally while maintaining the feel of a local arts and crafts fair.
Investments for future growth
Etsy has also continuously reinvested into its platform for future growth, offering tools, resources and support for its sellers. This includes marketing tools, analytics and educational resources that enhance the seller experience and contribute to their success. Research and development expenses are approaching $500 million a year and the company spends more than $100 million a quarter on marketing; both of which need to plateau long term. The good news is that crafted, handmade and customized goods have been exempted from 24-hour delivery expectations or meeting perfect specifications. Etsy has items on its site that you simply cannot find anywhere else.
Value analysis
The GF Value Line certainly indicates that Etsy's stock could be a value trap. One thing is for sure, the stock has been beaten down since February, when it was trading north of $150 a share. Just because a company's intrinsic value is considerably higher than its market price does not necessarily make it a value trap. That said, let's look at the stock versus the main competitor - eBay.
Etsy and eBay both generate over 70% gross margins and traded below 3 times sales. EBay trades for 10 times free cash flow, while Etsy trades at 11.5 times free cash flow. Etsy is growing faster on the top line with 46% year-over-year growth average in the last five years. By contrast, eBay's revenue seems to be contracting. The biggest difference is that eBay is consistently profitable, while Etsy is not yet. That is going to change going forward. In fact, at some point in the next 45 days, the company is set to release quarterly earnings, which should set up the expectations for how well the bottom line is actually doing. Right now, the estimates are between $3.67 and $5.08 per share for this year and up 6% next year. It is hard to see this as a value trap, rather a stock that has been pushed down to a fair value.
Etsy's future potential
The digital commerce sector is highly competitive, with near-complete price visibility leading to minimal customer loyalty. This intense rivalry pushes businesses to a race to the bottom, reducing costs and marginally enhancing delivery speeds. Etsy sidesteps most of that noise because of the niche it has chosen to operate in. Sometimes, choosing the game you want to play is more important.
Etsy has built a durable competitive advantage for the creator economy and generates significant impact by enabling these micro-businesses to grow and create jobs. It is also one of the few companies to emerge as one of the long-term winners in the e-commerce category because of the niche it serves. Collectively, the company's sellers have built a non-standardized suite of more than 100 million products, with those items mapping to neither stock-keeping units or universal product codes, allowing the marketplace to develop search algorithms that would be impossible for peers to emulate. That will not show up in the financial statements, but it is a huge part of the company's brand value.
The bottom line is Etsy is still growing fast and while a year of negative earnings seems to have hurt the company's share price, its brand and intrinsic value continues to strengthen.
