Etsy Inc. (Ticker: ETSY) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Company Description
Etsy Inc. is an e-commerce market place for buyers and sellers focusing on handmade or vintage items and craft supplies. Etsy provides approximately 66 million different items in its various retail categories to buyers through Etsy.com and Reverb.com. The categories of items include jewelry, bags, clothing, home decor, furniture, toys, art and various craft supplies and tools. Etsy provides seller services including Etsy Payments which is their payment process, Etsy Ads which is their advertising platform, and Etsy Shipping Labels which is their labels for shipments in the United States, Canada, the United Kingdom, and Australia. Etsy has seller tools including Shop Manager dashboard, Targeted Offers, educational resources, Etsy Seller Handbook, and Etsy Teams.
Quantitative Analysis
At the time of this writing (11/7/2021), ETSY is trading at $260.12 with a 52 week range of $113.49 - $283.40 and a market cap of $32.93B. In Q3 of 2021, revenue increased 18% year-over-year (YoY) to $532.4 million. Gross profit was $378 million for Q3 and adjusted EBITDA was $174 million up 33% YoY. Return of equity (ROE: Net Income / Total Equity *100) of ETSY is 77.17% and net margin (net income / revenue) is 21.55%. The debt to equities ratio (total liabilities / total equity) is 5.56 and the price to earnings (P/E) ratio is 74.88. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view ETSY’s 2021 Q3 earnings here and their 2020 Annual Report here. Below we have percent returns since January 1, 2020 denominated in US dollars and in Bitcoin. We have decided to include the stock price in Bitcoin to show how the stock is performing relative to the best current inflation hedge to further analyze equity performance during extraordinary inflationary times.
Qualitative Analysis
Etsy has continually grown throughout the pandemic and has continued to grow as mask mandates and pandemic related accessories have declined. This shows that people turned to Etsy during the pandemic for hand-made masks and various products and have continued to come for other products Etsy has to offer. Usership nearly doubled in 2020, according to Statista (see chart below) and it seems Etsy has been able to retain many of those users. Etsy Marketplace gained 7 million buyers during this past quarter which is slowed growth compared to Q3 of 2020 which was in the heart of the COVID-19 pandemic. Habitual buyers, which are buyers with 6 or more purchase days and $200 or more spent in the past 12 months, grew 65% YoY which means more and more buyers are coming and staying on Etsy. This is positive news going forward as Etsy looks to obtain more users and has had success retaining new users.
Bullish Thesis
Here are three points to support the bullish thesis:
Increased Users Post-Pandemic Related Buyers: During the height of the COVID-19 pandemic there was a massive shortage of masks, so many took it in their own hands and started creating masks and selling them on platforms like Etsy. This increased growth nearly doubled the amount of users from 2019 to 2020. This dramatic increase could not be sustained, but that is not something that should be viewed as a negative. As stated in the qualitative analysis, buyers increased by 6 million and there is still continual growth although it is not as rapid as the growth seen during the pandemic, sustained growth should not be something to scoff at.
Retainment of Users: As stated in the qualitative analysis above, habitual buyers grew 65% YoY which means more and more buyers are coming and staying on Etsy. This is encouraging because not only did the pandemic sky-rocket Etsy’s user base, it has sustained its growth. So either the buyers are now finding sellers with products that they enjoy or enjoying the buying process enough to come back. This is encouraging for Etsy investors as more and more people are coming to Etsy to either buy or sell and staying on the platform.
One Stop Shop for Sellers: Etsy has made their platform extremely seller friendly by offering a seller dashboard, marketplace, and even shipping labels to send products to their sellers. By making selling easy, sellers will not likely move their products to other platforms and buyers will not need to go to other platforms in order to purchase their favorite products or related products from their favorite sellers! This is another avenue how Etsy has creatively made a way to retain sellers because the sellers are the ones that keep this platform useful and buyers coming back. This is a creative way that Etsy has set itself apart from some of its competitors like Facebook Marketplace and various other avenues, by making the platform extremely seller friendly.
Bearish Thesis
Here are three points to support the bearish thesis:
Return to pre-pandemic shopping habits: COVID-related lockdowns forced consumers to online shopping platforms for the better part of 2020 (and in some countries, 2021). This rapid shift toward online shopping favored companies like Etsy, which already had a well-established web presence and a strong reputation with customers. However, as lockdowns ended, consumers moved offline and back into brick and mortar retailers - we covered this in our previous breakdown of Pinterest, who told investors that the return to pre-pandemic routines was a major contributor to their slowing growth in users last quarter. The same may be true of Etsy - as economies open back up, consumers may be less likely to shop online, which will obviously have negative consequences for Etsy.
Online retail competition: There is no shortage of competition when it comes to online retailers. Not only does Etsy face competition from traditional online retail giants like Amazon and Ebay, but they will also have to contend with all of the companies who allocated massive amounts of money into developing online platforms throughout the pandemic - including Walmart and Target. Etsy tends to specialize in “small seller” products, which may keep them relatively safe from large retailers like Walmart and Target, but it won’t save them from Amazon, Ebay, or other seller-friendly platforms like Facebook marketplace and, as discussed last week, Pinterest. It will also be interesting to see whether some of the sellers added during the pandemic return to work and become inactive on Etsy.
Potential economic downturn and drop in consumer spending: The U.S. is currently experiencing serious inflationary trends, relatively high unemployment, and general economic uncertainty. With rising prices and underemployment, it’s possible that retailers will see a drop in consumer spending, particularly on non-essential items that are commonly found on Etsy. Indeed, consumer confidence remains low and consumer spending has been much slower than many economists predicted earlier in the year. Although this is largely out of the control of Etsy, it’s something investors should keep in mind when considering their Etsy position.
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.