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Etsy (ETSY) Stock | NASDAQ: ETSY

The Creative Marketplace

Etsy Inc is an American retailer of handmade goods, vintage items, and crafted goods. The business model is based on sellers listing products on Etsy's platform.

The product categories are clothing & accessories, jewelry, craft supplies & tools, wedding accessories & clothing, entertainment items, home & living, vintage items, and child & baby goods. Etsy's revenue is categorized as marketplace revenue, seller services, and other revenue.

The marketplace consists of a platform where sellers can list their products in exchange for a fee paid to Etsy.

Growth

86

Valuation

56

Quality

68
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Where Are We Now

Updated on: 11/7/2021

Conviction Score

7

Etsy is the world’s largest promoter of small, niche product sellers and hosts a network of buyers and sellers to create an actual market for these goods. We currently think Etsy is the best online platform for sellers of niche handcrafted goods and vintage items. The company’s valuation is not crazy but not quite great either considering the low diversification of products on its platform.

  • Buyers and sellers continue to flock onto the platform well after the pandemic first began. The active seller base is growing over 100% per year while active buyers are growing at nearly 40%.

  • Etsy is looking forward to record growth this upcoming holiday season. However, we don’t think this will be a one-off. Etsy’s distributed supply chain will attract millions of new buyers and sellers for quite some time.

Investment Thesis

  1. Etsy is an online marketplace for artists and creators to sell unique homemade and vintage products. Etsy takes a percentage of each transaction on the marketplace.

  2. Etsy is building a two-sided network effect of both sellers and buyers on the platform becoming the marketplace of choice for niche handmade goods.

  3. The business is making acquisitions of other niche ecommerce platforms to build a House of Brands.

  4. Etsy and their acquired platforms benefit from the secular growth of ecommerce penetration. Growth of Gross Merchandise Volume (GMV) has been explosive.

  5. The pandemic may have pulled forward some growth for the business, but we believe the increased ecommerce penetration and growth in Etsy’s brand value to be large net-positive results. In addition, homemade face mask sales now represent a small portion of total revenue and GMV.

The Basics

Etsy is an online commerce platform to help artists and creators sell their homemade and vintage goods. Sellers can put up listings on the platform and ship to anywhere in the world.

When it comes to vintage items, Etsy sellers can put up items if they are 20+ years old.

Etsy reaches to consumers all over the world, with sellers in over 230 countries.

Their business is broken down into two segments: 

  • Marketplace Revenue 

  • Services Revenue

Marketplace revenue is generated from any fees related to sales and payments made on the platform. For every sale made, Etsy charges a 5% transaction fee on the price sold. Other fees include if the seller decides to accept remittance through Etsy Payments. The company charges 3% to 4.5% + a flat rate as a processing fee.

Services revenue is generated from any value-added services that a seller may want. These services include advertising through Etsy Ads, the distribution of shipping labels and more.

Etsy Revenue by Segment (Q3 2021)

Source: Etsy Investor Relations

Easy to Sell Yourself

Robert Kalin wanted an interesting name for the platform he had created with his peers. He wanted a nonsense word because he wanted to build up a brand from scratch. While in Italy, he kept hearing the phrase, “et si” or “oh, yes”. In French and Latin, et si meant “what if”. He took these ideas and put them together to make Etsy. It ended up becoming an acronym for “Easy to Sell Yourself”

Etsy was a site launched in 2005 by Robert Kalin, Chris Maguire, and Haim Schoppik, out of an apartment in Brooklyn. The main goal for Etsy was to create a platform that craftsmen could use to sell their goods. 

The platform started gaining a lot of traction once the team started building more tools for sellers. By 2007, there were 450 000 registered sellers, generating $26 million in sales. With this momentum, Etsy continued to push for newer features for their sellers, eventually reaching their one-millionth sale by the end of 2007.

The main concern that stood in the company’s way was its similarity to the auction platform eBay. Etsy wanted to divert from their competition by looking into features that other competitors didn’t have.

Etsy emphasized the idea of building a community. They released a tool to help buyers and sellers find each other through People Search, a Facebook-style social networking system. This helped to bring in even more users to the platform and they were able to become a distinguishable platform in the market.

As the years went on, Etsy acquired companies to expand their reach and capabilities, eventually filing for a $100 million IPO in 2015.

A Niche Marketplace

What makes Etsy special is its ability to give artists and creators the ability to monetize their niche products. 

As a two-sided market, not only do they give sellers a platform to sell, but also help these sellers by bringing in a large market of buyers. 

This is where their competitive advantage lies.

Other ecommerce platforms are not exclusive to one kind of item. Amazon and eBay are known to be a general marketplace “The Everything Store”. Etsy takes a different approach.

The Total Addressable Market for special and unique items makes up about $100 billion out of the $1.7 trillion ecommerce market. This figure continues to grow, and Etsy can supply the demands for both sides of the market.

As the ecommerce market penetration rate continues to increase against retail sales, Etsy’s business grows alongside it.

A Unique Platform

The Seller

Etsy’s platform is one like non other. Other marketplaces are filled with different kinds of items with no specific intention. Etsy on the other hand prioritizes items that are handmade and encompasses the idea of creativity. 

The platform always looks to support their sellers with new features releasing regularly.

Etsy launched a new dashboard to help sellers keep track of their orders while also viewing profit made.

These platform updates have allowed Etsy to grow its user base tremendously with over 5 million active sellers, individually generating $2,500 on average in Gross Merchandise Sales (GMS).

Etsy's New Seller DashboardSource: Etsy Investor Relations

The Buyer

Etsy is always looking to help buyers have a smooth experience when shopping for their favourite items. Through their platform, Etsy has completely changed how buyers view items through a revamped search engine which uses artificial intelligence to cater suggestions to every buyer. 

In addition, Etsy is always looking to streamline their logistics department, ensuring buyers get products in their hands as fast as possible. A cool feature that Etsy added was to allow famous designers and artists promote and market their products on the platform.

Prabal Gurung and Iris Apfel, two famous designers, sell products on Etsy, which brought in an influx of pre-existing and new buyers.

The Two-Sided Network Effect

Etsy’s business model is simple. For every transaction made, the company takes a small percentage of the total price. This kind of model is heavily dependent on both sellers and buyers as a growing number of sellers does not always translate into more revenue generated.

The active buyer base must also be growing. For Etsy’s case, both figures are growing tremendously by the year.

This is what attributed to Etsy’s impressive year-over-year growth and 70%-plus gross margins, while also subsequently increasing free cash flow.

It is uncommon for a company of this maturity and growth trajectory to produce free cash flow.

Etsy Revenue ($M) (Q3 2021)

Etsy EBITDA ($M) (Q3 2021)

Etsy Free Cash Flow ($M) (Q3 2021)

Building a House of Brands

Etsy has built a well-known brand with its craft and vintage marketplace, but their recent acquisitions to buy other marketplace platforms allow them to grab more market share and drive growth in other product verticals.

Both companies acquired focus on different types of products, which helps Etsy cover more ground with its consumers, building a house of brands. 

Etsy Quarterly GMS ($M) (Q3 2021)

Source: Etsy Investor Relations

Reverb

In 2019, Etsy acquired the musical instrument seller platform Reverb for $275 million

The beauty of musical instruments is that they are very liquid as the products can be bought and sold multiple times throughout its lifecycle. This created a huge demand for a centralized marketplace for musical instruments and Reverb was able to supply that. 

The plan with Reverb is to implement similar strategies that Etsy used such as improving search and discovery functions, making transactions smoother, and helping to build a community. These new additive functions will help Reverb generate organic growth for Etsy, while also helping the company grab more market share. Reverb is set to be the Etsy of musical instruments.

Depop

In 2021, Etsy acquired the second-hand shopping app, Depop, for $1.6 billion. The goal with this acquisition was to focus on a different generation in marketplaces, Gen Z. Statistically, more than 90% of Depop’s user base is under the age of 26. 

Instead of focusing on a new marketplace, Etsy decided to focus on a new age group as their main target market currently is catered towards millennials. This acquisition is set to help Etsy capitalize on the growing brand that Depop has created. Depop sits at the 10th most visited site that Gen Z’s visit, doubling their revenues from $35 to $70 million in 2020.

Etsy plans on doing the same acquisition strategy that they are doing with Reverb, implementing proven strategies into the platform. Etsy plans on revamping Depop’s search and discovery functions while also helping to build a community through social features.

Elo7

In 2021, Etsy plans to acquire Elo7, a popular marketplace for the arts & crafts creators of Brazil for $217 million. The platform is commonly known as the “Etsy of Brazil” with nearly 2 million users and over 55 000 active sellers.

This acquisition is a big steppingstone for Etsy as their market presence in Latin America is not as strong as compared to North American regions. Not only will Elo7 help to bring in more customers, but Etsy also plans to use this as a strategy to expand into other parts of Latin America.

Once again, just like its previous acquisitions of Depop and Reverb, Etsy intends to improve the Elo7 platform, mentioning a strong emphasis on giving sellers the ability to gain more value from their products.

Risks

Pulled-Forward Growth?

The pandemic forced many businesses to sell their products online. In addition, buyers were stuck at home receiving stimulus checks, thus they resorted to buying online. This is what helped Etsy incur a major influx in both buyers and sellers in 2020, leading to an increase in revenue, free cash flow and EBITDA. It is fairly evident that the pandemic pulled forward a lot of growth. 

Etsy's Mask Percentage Over TimeSource: Etsy Investor Relations

Throughout the duration of the pandemic, demand for face masks flew through the roof. This was a primary growth driver for Etsy’s sales, accounting for nearly 14% of all Gross Merchandise Sales (GMS) in the first half of 2020. As the quarters progressed, face masks as a percentage of GMS is on a decline, sitting at 2.5% of GMS in Q1 2021.

The question arises, will Etsy be able to continue this momentum post pandemic? Will they be able to use this extra money to work on refining their platform to sustain growth? These are questions investors should be asking as we transition into a post pandemic world.

We believe the brand awareness and active customers gained from the pandemic can be sustainable when looking towards the future as new customer penetration will ultimately be a net positive for the business long term.

Switching to Competition

Even if selling creative goods, Etsy is not the only eCommerce platform in town for sellers to reach buyers.

Etsy gave small business owners the opportunity to display their arts and crafts to the world. This was nearly a decade ago and now there are many competitors who can give creators the same ability. 

Etsy charges high transaction fees for products sold and for payments. Unless a seller has a very high profit margin, it may not always be sustainable to sell products on Etsy.

Many users are making the switch to other eCommerce platforms such as Shopify and Handmade @ Amazon, as these platforms offer users a consolidated platform to access payments, ads, and sales tracking. For more popular and experienced sellers on Etsy, they are more inclined to open a Shopify store and notify their buyers, than stay on Etsy and lose out on more money. 

Investors should be aware of Etsy’s transaction fees along with how they plan to keep their platform sticky for more seasoned sellers as their take rate can easily be competed against or else, they can lose sellers.

Bottom Line

Etsy has brought forth a powerful platform to help artists and creators showcase their art, while also giving them a platform to monetize their work.

What makes the platform so special is its ability to give a two-sided network the ability to buy and sell niche products. Instead of resorting to general marketplaces, buyers and sellers are given a platform to access anything related to homemade and vintage goods.

Etsy’s emphasis on providing quality features for both sellers and buyers keeps their platform growing and dominant. Their constant push for new features in user experience and artificial intelligence help to bring in an influx of both sellers and buyers.

Their strategy to acquire large ecommerce platforms for specific target markets not only helps them to increase their market share but also widens Etsy’s brand image, being able to host all kinds of product lines.

It is no question that the pandemic helped pull forward Etsy’s business to generate record numbers, but it is important to see how they continue this momentum as society transitions into a post pandemic world, with the ecommerce penetration rate growing steadily with retail sales.

In addition, Etsy should constantly be looking to widening the moat in their two sided network against other competitors. Etsy needs to continue to distinguish themselves as the platform of choice for both buyers and sellers on the marketplace, as their high transaction fees may be a pain point for new sellers pushing away sellers moving a high amount of Gross Merchandise Sales (GMS).

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