The e-commerce company has proven to be one of the few “Amazon-proof” businesses, focusing on handmade and craft products. Is Etsy stock a good investment?
Etsy (NASDAQ: ETSY) is an online marketplace connecting buyers and sellers of unique products and went public in 2015. It has proven to be resilient in the face of stiff competition from the likes of Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY) and has prospered. Like many companies, Etsy was initially challenged by COVID-19, but it has acted as a catalyst for growth while traditional retailers have struggled. However, does the niche that Etsy has carved out in the e-commerce space make it a good buy?
The bull case for Etsy:
Etsy believes that the connection between buyers and sellers is key to its success and differentiates it from competitors with a mission to “keep commerce human.” Etsy has only scratched the surface of a huge market opportunity that it estimates will be valued at $437 billion by 2023. Etsy has demonstrated its global footprint with 37% of gross merchandise sales (GMS) in 2019 located outside of the U.S.
Etsy has continued to perform with revenue increasing by 34.7% to $228 million in Q1 of 2020 and gross merchandise sales of $1.4 billion up 32.2% with sellers pivoting to meet demands. In April of this year, Etsy’s core marketplace saw a considerable increase of 79% year over year with ad revenue up 70% year-over-year. Etsy’s ability to pivot quickly was demonstrated in the last quarter as they met surging demand, and highlights its agility as a company to prosper in a challenging environment for many businesses’.
“Etsy.com” is no longer the only revenue stream for the company. “Reverb” is a subsidiary of Etsy and operates as a standalone platform selling new and used vintage instruments. Etsy bought “Reverb” for $275 million in cash in August 2019. In the latest quarter, it contributed $168.3 million in GMS.
Etsy continues to invest in product development to enhance user experience on the platform by improving algorithms and having free shipping for orders over $35. CEO Josh Silverman stated that they were withdrawing full-year guidance due to the current economic climate and expect revenue to grow 70-90% in Q2 of 2020.
In 2019 Etsy became the first e-commerce company to offset the impact of global emissions from shipping, highlighting its ecological responsibility.
The bear case for Etsy:
Although it has proven resilient in the past, this does not guarantee future success. However, Etsy continues to invest in its platforms while managing costs to deliver long term growth even in difficult conditions such as a recession. Although there has been significant growth in recent months, Silverman said in the earnings call that they expect to see a deceleration in growth due to less disposable income and with lockdown easing, people will undoubtedly return to traditional retailers. The exposure to new consumers and sellers that Etsy has received in the last few months is invaluable and can pave the way for future growth.
Many buyers and sellers are being attracted to Etsy’s platform due to its niche and unique products, which could be as much of a hindrance as a help when it comes to scalability. The nature of their position in the market means that it is unlikely Etsy will ever reach the heights of Amazon, but there is still a significant runway for growth.
So, should I buy Etsy stock?:
The growth in e-commerce, coupled with the niche that Etsy has carved out, makes it a compelling investment despite the stock being at all-time highs. Etsy has demonstrated that it can grow naturally along with making acquisitions that can meaningfully impact the balance sheet. Management is remaining cautious due to the economic climate but is continuing to deliver significant growth with a long term focus, which should reward investors. Etsy appears to be an attractive investment, and a dollar-cost averaging approach could be employed in order to spread the cost basis and mitigate any dips.
Yes, Etsy is profitable, taking in a gross profit of $145.6 million in Q1 of 2020.
Etsy does not pay a dividend.
Josh Silverman was appointed as CEO in 2017 and is also on the board of Shake Shack (NYSE: SHAK).
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