Here's Why Etsy's Strong Growth Can Persist

Online marketplace Etsy (ETSY 0.34%) has seen its growth accelerate recently, with fourth-quarter revenue rising 23.6% year over year compared with 21.5% growth in Etsy's third quarter. Indeed, revenue growth has accelerated for three quarters in a row.

While strong growth in Etsy's marketplace revenue gave Etsy a boost during the quarter, Etsy's seller services have been integral to Etsy's strong growth rates recently. Here's what's behind the segment's rapid growth -- and why the segment looks positioned to deliver more upside.

Image source: Etsy.

A catalyst

Etsy's revenue is primarily derived from two main segments: marketplace and seller services revenue. A small portion of revenue comes from a segment Etsy calls "other." Of these segment's, Etsy's seller services revenue is not only the company's biggest, but it's also Etsy's fastest growing, making it a strong force for Etsy's business.

Data source: Etsy's 2017 10-K. Table by author.

Accounting for almost 59% of revenue and growing about 29% year over year in 2017, the seller services segment and the drivers behind it are crucial for investors to understand.

Etsy seller services revenue is mostly made up of four paid services: Etsy Payments, promoted listings, shipping labels, and Pattern (a service that helps sellers build custom websites). But Etsy also generates seller services revenue from commercial partnerships.

As tools specifically designed to help its sellers, investors should like seller services revenue. Not only is the segment aligned with providing value to the sellers on Etsy's platform, but it also provides Etsy a fairly consistent revenue stream while making Etsy sellers more connected to Etsy's ecosystem. These software-as-a-service revenue sources simultaneously improve sellers' businesses while heightening their switching costs as they invest in Etsy's platform.

But can Etsy's keep up its robust growth in seller services? I think so.

More growth ahead

The primary reason investors should expect more growth in seller services is because the segment has seen accelerating growth recently. Etsy's seller services revenue in its fourth quarter increased 33.3%, up from a growth rate of 30.6% in Q3 and 25% in Q2. Etsy is clearly benefiting from strong trends in the segment.

Unsurprisingly, Etsy management guided for 21% to 23% full-year year-over-year growth in total revenue in 2018 -- an acceleration from its revenue growth of 20.9% in 2017. Given how seller services accounts for the bulk of Etsy's revenue, this guidance suggests management expects the segment's tailwinds to persist.

But a close look at adoption rates of annually disclosed seller services metrics perhaps does the best job of highlighting the broad-based strength Etsy is seeing in the segment and, as a result, why investors can expect more strong growth.

• In 2017, 54% of Etsy's active sellers used at least one seller service, up from 52% last year.
• In the same period, about 50% of active sellers, up from 46% last year.
• About 85% of Etsy's gross merchandise sales were processed with Etsy payments in 2017, up from 78% in 2016.
• Promoted listing usage by sellers increased 4% year over year in 2017 and promoted listing revenue increased "robustly, driven by both higher click-through rates and new inventory," management said.
• 28% of active sellers where Etsy's shipping label service is available used the service in 2017, up from 26% last year.

Considering all of this data, it's no surprise that Etsy said during its fourth-quarter earnings call that it expected seller services revenue to continue to grow faster than marketplace revenue and gross merchandise sales in 2018.