Etsy is a huge marketplace that allows craftspeople such as knitters, sewers, and jewellery makers to sell their products to millions of buyers.
It’s like a craft fair – however, instead of taking place in the local town square with just a few different traders, it takes place online. The platform also boasted close to 4.4 million active sellers in 2020—exploding from just 2.7 million in 2019.
After recent acquisitions – including Gen Z favourite Depop for more than $1.6 billion – Etsy has already seen its share price rise by more than a quarter in recent months.
So, given its popularity and growing power, is now the time to think about getting involved yourself?
Fundamentals of Etsy stock
In 2020, Etsy raked in a whopping $1.7 billion in revenue. That’s almost a billion more than its 2019 figure of $818 million. Earnings per share, meanwhile, multiplied to $2.69 from $0.76.
On top of the online spending surge during the Covid-19 pandemic, the company also saw a full year of benefit from its Reverb acquisition, which completed in August 2019. Reverb is an online marketplace for new, used and vintage music gear, which Etsy bought for $275 million.
And its 2021 performance has also been solid so far. First quarter earnings per share came to $1, 19% ahead of consensus and far higher than the prior year’s $0.10.
While quarterly revenue, at $551 million, was up 141% year-on-year, it was still an 11% dip on the fourth quarter of 2020. That being said, it still beat consensus targets of $533 million.
Not only that, but the sum beat Etsy’s own first quarter revenue guidance. Its $551 million figure exceeded top end expectations of $536 million.
The firm has a $25.1 billion market cap at time of writing. Its price-to-earnings ratio is 57.68x, with a 13.49x price-to-sales ratio.
The company’s current chief executive is Josh Silverman, former Skype CEO and former president of Consumer Products and Services at American Express (NYSE: AXP).
Etsy’s latest acquisitions, under Silverman’s leadership, could spell a new chapter for the firm.
What is the bull case for Etsy?
Point one in the bull case for Etsy is its new acquisitions.
UK-based Depop, for example, is a fashion marketplace app brimming with unique items. Founded in 2011, it is immensely popular with Gen Z and Millennials since it lets them make money from unwanted items – with around 90% of users under the age of 26.
Depop’s gross merchandise sales in 2020 amounted to around $650 million, with revenue of $70 million – each rising more than 100% from 2019.
Not only that, but Etsy is also buying Elo7 – dubbed the “Etsy of Brazil” – for US$217 million. Elo7 has around 1.9 million active buyers and 56,000 active sellers.
Having beaten its first quarter expectations, the company has performed excellently – maintaining its track record for exceeding its guidance.
That pandemic boost to e-commerce has clearly benefitted the firm, lifting its profile. As Silverman remarked in its first quarter results, millions of buyers discovered Etsy for the first time in 2020, with its market opportunity now bigger than ever.
The company is an established and growing player, doing well now in both the UK and Germany. For example, in 2020, its gross merchandise sales (“GMS”) saw a 189% leap in the UK and a 109% rise in Germany compared to 2019.
UK domestic GMS topped 70%, meaning more than 70% of GMS was between buyers and sellers in the same country. Rising domestic GMS is evidence of buyer GMS growth. In fact, Etsy was a top five e-commerce website in the UK in the fourth quarter of 2020.
Similarly, German domestic GMS was over 50%, with the country representing the company’s second largest international core geography.
What is the bear case for Etsy?
While Etsy’s first quarter was stronger than the year before, it was still weaker than the fourth quarter of 2020, with the company expecting deceleration in the second quarter along with e-commerce in general.
Understandably, the firm does not expect the extraordinary growth of 2020 to continue through 2021. As ordinary stores re-open, it would be wise to assume many will return to brick-and-mortar stores once more.
As a result, things are likely to slow down at least in the near future.
Moreover, Etsy’s offering is rather specific and unique. While it is possible to purchase a handmade puffin keychain and other craft creations, it’s unlikely to become an ‘everything store’ on par with Amazon.com (NASDAQ: AMZN).
And speaking of Amazon, there’s also Amazon Handmade – the consumer behemoth’s new microsite, which represents serious competition in the space. Indeed, having products put in front of Amazon’s hundreds of millions of customers, with over 200 million Amazon Prime members worldwide alone, is certainly a draw for many sellers.
Other competitors for Etsy include IndieMade, Storenvy, and Aftcra.
These other options also mean Etsy’s fees must stay competitive. At present, there is a tiny fee for listing items that comes in at just $0.20. Then, in the event of a successful sale, there is a transaction fee, payment processing fee, and a fee for offsite adverts.
More established sellers can be tempted to create their own website, both to avoid these fees and gain more control over their marketing.
With no shortage of competition, and a shift away from the e-commerce explosion of 2020, it’s not all sunshine and roses for Etsy.
Should I invest in Etsy stock?
Etsy has much to celebrate – solid financials, enticing acquisitions, and a growing overseas presence. However, now may not be an ideal time to invest.
After all, the euphoria surrounding recent acquisitions is unlikely to last forever. Likewise, easing lockdowns mean that the firm will face increasingly fierce competition both from online and physical stores.
Etsy itself is also expecting things to slow down, with signs already visible in the first quarter versus the end of 2020.
Buying the company now, then, when shares are up 14% year-to-date and 17% on a one-month basis, might not be the best financial move. It could put one at risk of buying at the top of the market.
However, the stock is certainly worth keeping an eye on. Should the price level out in future, it might well prove to be an excellent bet.