Despite Rising Competition, Etsy Inc Is Here to Stay

Looking for that perfect gift or accessory, personalized with your initials and that extra pocket or clasp that you always wished similar products would feature? Etsy (ETSY 2.86%) has you covered.

Few companies are as embedded in the customization super trend as Etsy. The craft and artisan goods marketplace has built an entire business model around consumers' desire for unique, handcrafted products. In this clip from Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Asit Sharma examine the increasing competition in this space, where Etsy currently stands, and its prospects looking forward.

A full transcript follows the video.

This podcast was recorded on Oct. 4, 2016.

Vincent Shen: This is a really good example. The company is Etsy. It's smaller than the other two companies we've focused on so far, but I think they're a perfect example in terms of how customized or personalized products are becoming so popular. Etsy, if you're not familiar with it, is an online marketplace for handmade craft artisan goods. The company went public in April of 2015. That first day of trading was, arguably, its best day. The price, from $16 per share, jumped up to $30 in the first day of trading. With some new competition, which we'll talk about quickly, the stock has already had a mini boom-bust period in the ensuing year and a half. It's currently trading back around $15, but it topped out at $30, was at some point as low as $6 to $7 per share earlier in 2016.

The company has 1.7 million active sellers, 26.1 million active buyers, by far the biggest platform of its kind for handmade crafted goods. What do you think about the company, Asit?

Asit Sharma: I think the company is an interesting long-term buy. Everyone had concerns about Etsy post-IPO, because it had such a high marketing spend relative to its sales. Folks were worried about Amazon.com's (AMZN 1.30%) Handmade marketplace coming into competition with Etsy. Also, there was a concern that, is there really a market for this long term? The craft and artisan movement, is that a fleeting fad?

I think what Etsy has shown us recently with its results is that, No. 1 they are able to control their spend. They're moving their marketing spend more to a digital-based marketing. So, we're starting to see a little bit better pop in gross margins and in the bottom line. Also, Amazon.com, for all its might, doesn't seem to have impacted Etsy's business so far. I'll put that back to you in just a second, Vince. Thirdly, the company is growing its global sales at a great clip. This last quarter, they grew international sales by 57%. This indicates that they can continue to expand globally. If you look at Europe, Asia, and Africa, where some of their business is starting to spread, there is a lot of demand for the same kind of artisan materials and customized materials that we're enjoying here in the United States.

Shen: Yeah, absolutely. On the Amazon Handmade side, for a company that's obviously proving themselves to be very strong in this e-commerce space, this model, they too are expanding abroad. I think, initially, they were in just a handful of European countries. Now, they're spreading across the entire continent. Amazon Handmade is still a much smaller platform, though. They are at the point where they might have about, the last number I found was 500,000 product listings, whereas with Etsy, it's a much bigger number, in the millions. When you take all of that into account, I think, overall, this trend is the kind of situation where the tide lifts all the ships.

Obviously, Amazon is not a competitor I would ever underestimate in this space, and Etsy should be aware of what the company is doing and how it might impact their business. But, overall, this trend is something that will continue to grow, and as Etsy finds its footing, can decrease marketing, for example, as a percentage of its revenue. They have ... 81% of the gross merchandise sales in 2015 came from repeat purchases. Shoppers are obviously building some of that loyalty that you mentioned, Asit. And they like what they see. I personally think that Etsy is really attractive marketplace. My experiences shopping there have been very positive. Amazon is definitely very familiar, but there's something about Etsy, there's just something special about the way it's crafted. The way it started was for these handmade customized goods, whereas Amazon, it was the more traditional retail items.

Sharma: I agree. Etsy has that cache of offering the handmade artisan goods. You almost want to look there first. Just to sum up on Etsy, they have the first-mover advantage, which seems like they're retaining. This year, they raised fiscal guidance for revenues, profit. It may be a bumpy ride, so we're not obviously advising people to jump into this stock. But definitely keep an eye on it. It seems like they're holding their ground so far, and there is a market, as we discussed this entire episode, for custom goods. And Etsy is in the right place at the right time.