In this Industry Focus discussion of online craft marketplace Etsy (NASDAQ:ETSY), the team discusses the trade-offs between profit and idealism -- a struggle which Etsy has very publicly endured in 2017. It has been a tough road as new leadership attempts to find a balance between social impact and satisfying shareholders.
A full transcript follows the video.
This video was recorded on Dec. 5, 2017.
Asit Sharma: The question for some investors who wanted to both profit from the stock and participate in this feel-good story is, has the original mission of Etsy been lost, and is it now more of a corporate-style entity? And Vince, I know you shop on Etsy, and I've shopped on Etsy before, what are your thoughts?
Vincent Shen: This is a really tough position, because it comes down to a balancing act of values and ethos, as you mentioned, that the company, the work force wanted to maintain. They often boast, for example, in their financial statements, in terms of facts about the business, how a large majority of sellers on Etsy are women, and trying to empower the sellers on their platform to be entrepreneurs and build up these businesses and the supplemental income, and maybe become their primary career or whatever it is that they're working on.
At the same time, in terms of when Silverman took over in May, the six months or so before then, there was already tons of pressure growing on the company to not only increase its top line growth but also potentially seek out other strategic alternatives, for example, putting themselves up for sale as a result of certain activist investors and hedge funds taking positions in the company. Ultimately, when Silverman took over from the prior CEO, Chad Dickerson, he applied much more conventional guidelines and practices to lead the company into the next stage. As you mentioned with the latest quarterly results, they seem to be working, two strong quarterly reports now, accelerating growth for some of those really important company metrics like total revenue, gross merchandise sales. They've had positive earnings for two quarters, they're growing their number of sellers and buyers on the site. But this all comes at a price.
Asit, you shared a great article with me before the show from the New York Times that covered some of the changes, both good or bad depending on who you ask, that Silverman implemented when he took over as CEO. I think, despite the stock gains and improving results we've seen from his initial six-month tenure, he seems to be pretty controversial within the company itself.
Sharma: Yeah. I think there are supporters of his style who see that there's new accountability at Etsy, and there's more risk taking in the culture. This was brought up in the New York Times article. But there are also those who feel that the way the company conducts business doesn't look much different than other e-commerce companies that we're used to analyzing on the show and that investors are familiar with.
I'd like to pick out one thing from the recent conference call transcript that Etsy had, which to me crystallizes this push and pull between what employees want to see in the company's best iteration and the realities of the business world. This is Josh Silverman talking to analysts recently, in the beginning of November. He says, "We launched scarcity badges to alert buyers when items are only available in limited quantities. By creating a sense of urgency, we can leverage our unique inventory and nudge buyers along the shopping journey. We think scarcity badges are a particularly powerful tool for Etsy, given that so much of our inventory is made of unique, special items that, by nature, are scarce. It's also a response to a common buyer frustration, finding an item and favoriting it only to come back later and find that it's already been sold." You can look at this statement in a number of ways. It's like a Rorschach test. If you're an investor, that sounds great, because you're creating that sense of urgency which forces someone to click to buy the product and the sale is complete. But if you are an Etsy employee and you hear this, this sounds like the kind of practice that you didn't sign up for, because it's preying on this thing that we're all vulnerable to on the internet, which is the marketing messages, the feeling that you have to buy now. That isn't part of the original philosophy of Etsy. It's hard to say. Does this mean that the company is going to totally divorce itself from those founding principles? Probably not. But it reflects a reality. Listeners, if you want to look up that article in the New York Times, it's a very nice article, I think it was the 25th of November.
One more point that comes to mind about Etsy is, maybe it should have just stayed private, although it's always hard to raise that capital. I have met Chad Dickerson a couple of times, actually through marriage related to a close friend of my wife's. He's a charismatic, very sharp guy, very capable, obviously exudes that holistic new CEO of the next sort, the kind that balances financial acumen with caring. And if they had stayed private, I think they could have done very well under someone like him. But going public changes everything, because you're not just accountable to those employees and private investors, you're accountable to you, listeners, who are investing in the stock. And that's a different ball game.
Shen: We've talked before about the changes when a company has gone public, and they need to meet the demands of Wall Street and to succeed in that kind of world where, a lot of times, you're going quarter-by-quarter, and we're not encouraging that viewpoint, but that is a viewpoint that a lot of investors take. We, of course, encourage you to take a longer-term view.
And maybe that's exactly what a lot of stakeholders in this company feel would have been preferable compared to "selling its soul" in order to meet the demands of being a public company. Overall, I think Etsy has proven itself as a viable and pretty compelling business. There were talks previously about how Amazon Handmade, which is kind of a direct competitor in terms of this more artisan craft marketplace, would essentially put Etsy out of business. They've thrived despite that. And as a frequent Etsy shopper myself, I think the company really presents a unique vibe that stands out from other marketplaces like eBay. Any last comments from you, Asit? Maybe thoughts on what lies ahead for the company?
Sharma: One of the things that Silverman has done is to curtail the international expansion that Dickerson was really pushing. Dickerson wanted to reach a lot of women in impoverished countries and also create business by opening up in different parts of the globe. I think we're going to see that resume over the long-term after a little bit more stabilization of the balance sheet. The company has a lot of opportunity. And let's face it, it's better than most in terms of its social goals and sustainability, still. It hasn't totally left behind why it was founded, to help people make a living, as well as provide beautiful products. Like you, I think the site is special, I think the products are unique and special. It should do well over the long term. You can still buy it and feel fairly good about yourself.