ETSY PROSPECTUS
Description
Etsy is an American e-commerce website founded on 18th June 2005, focused on handmade and vintage items and craft supplies. Etsy operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers. Etsy’s primary marketplace is their website, (Etsy.com). The Etsy marketplace connects creative entrepreneurs with thoughtful consumers looking for items that are intended to be special, reflect their sense of style, or represent a meaningful occasion. Etsy operates in 6 core geographies (United States, United Kingdom, Canada, Germany, Australia and France). These six locations have the largest concentrations of Etsy buyers and sellers.
Etsy is an American e-commerce website founded on 18th June 2005, focused on handmade and vintage items and craft supplies. Etsy operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers. Etsy’s primary marketplace is their website, (Etsy.com). The Etsy marketplace connects creative entrepreneurs with thoughtful consumers looking for items that are intended to be special, reflect their sense of style, or represent a meaningful occasion. Etsy operates in 6 core geographies (United States, United Kingdom, Canada, Germany, Australia and France). These six locations have the largest concentrations of Etsy buyers and sellers.
Industry Overview
The Ecommerce industry has been growing for the past 10 years at steady rate of around 15%. However, in 2020 there has been a massive spike in total sales for eCommerce with a 44% growth rate due to the COVID19 pandemic.
Etsy differentiates itself from major eCommerce retailers by focusing on handmade products and providing various services to its sellers. Sellers can solely focus on developing their products and entrust Etsy to manage their other business aspects such as inventory management, advertising, shipping, accounting for a small fee.
Etsy’s biggest competitors are mainly Amazon and Shopify. Amazon Handmade was launched in 2015 to compete with Etsy. Labelled as “Etsy Killer” by the media, Amazon handmade did not have an impact as expected due to its higher platform fees and low restrictions on products listed. The high platform fee deterred sellers from using their platform, and the low restrictions on products listed led to a rise in scandals on their platform where sellers listed factory manufactured goods bought on Alibaba as “handmade”. Etsy on the other hand, is very strict on listings by their sellers; Etsy closely monitors listings by their sellers to ensure that they are authentic. Other direct competitors like Artfire, Aftcra and Storenvy are still too small to compete with Etsy’s customer base of 45 million in 2019.
Investment Rationale
Even with a significant growth in price in the past year, Etsy is still growing and projected to hit a price target of $400 in 3 years. This is due to strong earnings report every year, large addressable market, strong growth opportunities and a very solid business model.
Valuation
For the nine months ended 30 September 2020, Etsy’s revenues increased from $548.4M to $1.11B. Net income increased from $64.6M to $200.7M. Revenues reflect Marketplace revenue increase from $401.5M to $829.6M, Services revenue increase of 93% to $278.7M. Gross Merchandise Sales (GMS) for 9months ending 30th September was $3.3B in 2019 and $6.7B in 2020, a growth of 101%.
However, this valuation does not put into context the intangible value Etsy possesses as Valuation should be interpreted in its proper context. A company that generates vigorous growth and performs above expectations deserves a higher price to sales ratio than a business with decelerating growth rates and failing to meet expectations.
Analysis
Etsy has been growing at a rate of 86.41% in the last 5 years. Using a conservative growth rate of 40% per year, Etsy EPS in 2021 would be 5.1 and using Amazon as a baseline with a PE ratio of 79 and, Etsy would be valued at 402.9 in 2023.
Etsy differentiates itself from major eCommerce retailers by focusing on handmade products and providing various services to its sellers. Sellers can solely focus on developing their products and entrust Etsy to manage their other business aspects such as inventory management, advertising, shipping, accounting for a small fee.
Etsy’s biggest competitors are mainly Amazon and Shopify. Amazon Handmade was launched in 2015 to compete with Etsy. Labelled as “Etsy Killer” by the media, Amazon handmade did not have an impact as expected due to its higher platform fees and low restrictions on products listed. The high platform fee deterred sellers from using their platform, and the low restrictions on products listed led to a rise in scandals on their platform where sellers listed factory manufactured goods bought on Alibaba as “handmade”. Etsy on the other hand, is very strict on listings by their sellers; Etsy closely monitors listings by their sellers to ensure that they are authentic. Other direct competitors like Artfire, Aftcra and Storenvy are still too small to compete with Etsy’s customer base of 45 million in 2019.
Investment Rationale
Even with a significant growth in price in the past year, Etsy is still growing and projected to hit a price target of $400 in 3 years. This is due to strong earnings report every year, large addressable market, strong growth opportunities and a very solid business model.
Valuation
For the nine months ended 30 September 2020, Etsy’s revenues increased from $548.4M to $1.11B. Net income increased from $64.6M to $200.7M. Revenues reflect Marketplace revenue increase from $401.5M to $829.6M, Services revenue increase of 93% to $278.7M. Gross Merchandise Sales (GMS) for 9months ending 30th September was $3.3B in 2019 and $6.7B in 2020, a growth of 101%.
However, this valuation does not put into context the intangible value Etsy possesses as Valuation should be interpreted in its proper context. A company that generates vigorous growth and performs above expectations deserves a higher price to sales ratio than a business with decelerating growth rates and failing to meet expectations.
Analysis
Etsy has been growing at a rate of 86.41% in the last 5 years. Using a conservative growth rate of 40% per year, Etsy EPS in 2021 would be 5.1 and using Amazon as a baseline with a PE ratio of 79 and, Etsy would be valued at 402.9 in 2023.
Reasons for Buying
Upcoming Earnings Report
Etsy’s 2020 Annual report is due to be released on 25 Feb 2021. For the past few years, Etsy has outperformed its earnings estimate consistently. Based on Q1 to Q3 performance in 2020 revenue has roughly doubled and with Q4 being the sale season, it is expected to bring Etsy’s revenue for the year even higher than projected. This results in a high chance for the price to spike after the release and change investor’s sentiments.
Etsy’s 2020 Annual report is due to be released on 25 Feb 2021. For the past few years, Etsy has outperformed its earnings estimate consistently. Based on Q1 to Q3 performance in 2020 revenue has roughly doubled and with Q4 being the sale season, it is expected to bring Etsy’s revenue for the year even higher than projected. This results in a high chance for the price to spike after the release and change investor’s sentiments.
Potential market & Consumer sentiment
In 2019 Etsy has only an estimated market share of 5% in for a market of $100B for specialty creative products and around 2% market share when including online spending market of all relevant retail categories and core geographic markets. This means there is a very high available market opportunity for Etsy to grow and capitalize on.
In recent years, consumers are slowly moving away from mass produced products and are looking for more specialized products. The creative economy is an emerging economic sector that makes up 3% of GDP that is strengthened by a surge in digitization. This means that Etsy can benefit from the growth in the sector.
Business Model
Etsy’s business model has 6 revenue streams namely, listing fees, transaction fees, advertising and promotion fees (commission), subscription revenue and payment processing fees. With multiple income stream due to diversification, Etsy is less prone to have less impact on revenue if one out of the six income streams happen to be affected due to economic factors.
Advertising commission fees mean that Etsy charges its sellers when they make a sale using their advertising on top of their base transaction fees. This means that Etsy in increasing its revenue while keeping their expenses low as their making their seller pay for their advertising.
Risks
With the release of Covid19 vaccines, the pandemic problem will settle down and reopening of physical retail stores, there is a possibility that the eCommerce industry might take a hit. This may cause Etsy’s revenue to fall or not grow as much as predicted.
With revenue and earnings growth being extremely high in the past few years, it is possible that we see a drop in the percentage growth rate in 2021. This may cause bearish reactions in the general wall street consensus leading into sell offs. However, this fall in price would signal an entry point for investors that may want to average down their buy price.
Environmental, Social & Economic
Etsy is committed to growing sustainably by aligning their mission, guiding principles, and business strategy. Etsy has developed and adopted various strategies such as Supply Chain Responsibility, Renewable Electricity, Energy Use & Efficiency, Carbon Offset Shipping to eliminate carbon impacts and foster responsible resource use. Etsy’s management and CEO Josh Silverman focuses on “Keep Commerce Human” in which focuses on the power of human connection and reminds employees to focus on people allowing buyers and sellers to create their own stories by working together. Making and buying unique customized products made just for them.
Conclusion
Etsy is a relatively young company with an attractive business model in a high growth industry, and financial performance has been outstanding recently. For these reasons, the stock looks well-positioned for attractive returns in the years ahead.
Appendix
Consumers spent $861.02 billion online in the U.S. in 2020, up an incredible 44.0% jump compared with 2019. That’s the highest annual U.S. ecommerce growth in at least two decades. Total retail sales, including merchandise purchased in stores and through catalog/call centers, increased 6.9% last year to $4.04 trillion, early analysis from Digital Commerce 360 shows. This is the highest growth in total retail sales since 2005. This means ecommerce now accounts for 21.3% of total retail sales, up from 15.8% in 2019 and 14.3% in 2018.
In 2019 Etsy has only an estimated market share of 5% in for a market of $100B for specialty creative products and around 2% market share when including online spending market of all relevant retail categories and core geographic markets. This means there is a very high available market opportunity for Etsy to grow and capitalize on.
In recent years, consumers are slowly moving away from mass produced products and are looking for more specialized products. The creative economy is an emerging economic sector that makes up 3% of GDP that is strengthened by a surge in digitization. This means that Etsy can benefit from the growth in the sector.
Business Model
Etsy’s business model has 6 revenue streams namely, listing fees, transaction fees, advertising and promotion fees (commission), subscription revenue and payment processing fees. With multiple income stream due to diversification, Etsy is less prone to have less impact on revenue if one out of the six income streams happen to be affected due to economic factors.
Advertising commission fees mean that Etsy charges its sellers when they make a sale using their advertising on top of their base transaction fees. This means that Etsy in increasing its revenue while keeping their expenses low as their making their seller pay for their advertising.
Risks
With the release of Covid19 vaccines, the pandemic problem will settle down and reopening of physical retail stores, there is a possibility that the eCommerce industry might take a hit. This may cause Etsy’s revenue to fall or not grow as much as predicted.
With revenue and earnings growth being extremely high in the past few years, it is possible that we see a drop in the percentage growth rate in 2021. This may cause bearish reactions in the general wall street consensus leading into sell offs. However, this fall in price would signal an entry point for investors that may want to average down their buy price.
Environmental, Social & Economic
Etsy is committed to growing sustainably by aligning their mission, guiding principles, and business strategy. Etsy has developed and adopted various strategies such as Supply Chain Responsibility, Renewable Electricity, Energy Use & Efficiency, Carbon Offset Shipping to eliminate carbon impacts and foster responsible resource use. Etsy’s management and CEO Josh Silverman focuses on “Keep Commerce Human” in which focuses on the power of human connection and reminds employees to focus on people allowing buyers and sellers to create their own stories by working together. Making and buying unique customized products made just for them.
Conclusion
Etsy is a relatively young company with an attractive business model in a high growth industry, and financial performance has been outstanding recently. For these reasons, the stock looks well-positioned for attractive returns in the years ahead.
Appendix
Consumers spent $861.02 billion online in the U.S. in 2020, up an incredible 44.0% jump compared with 2019. That’s the highest annual U.S. ecommerce growth in at least two decades. Total retail sales, including merchandise purchased in stores and through catalog/call centers, increased 6.9% last year to $4.04 trillion, early analysis from Digital Commerce 360 shows. This is the highest growth in total retail sales since 2005. This means ecommerce now accounts for 21.3% of total retail sales, up from 15.8% in 2019 and 14.3% in 2018.
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