In the span of just a few years, Etsy (NASDAQ:ETSY) has gone from disappointment to market darling. The stock floundered after its 2015 initial public offering, but shares soared once a new CEO took over in 2017; Josh Silverman cut costs, laid off staff, and focused on getting the company back to business basics, like delighting customers.
Since Silverman was named CEO in May 2017, the stock has risen more than 400%:
While a number of moves have helped propel both the company and the stock's growth during that time, one decision in particular has caused the stock to surge since last June.
What sent the stock up 26% on June 14, 2018 was Etsy's announcement that it would raise fees on sellers starting in mid-July of that year. The crafts-oriented online marketplace said it was raising transaction fees on sellers from 3.5% to 5%, effectively increasing its take rate on transactions by 43%. The company said the new 5% charge would apply to shipping fees, explaining that the new fees would help it make investments in marketing, customer support, and product innovation.
As a result of the new fee structure, Etsy lifted its full-year revenue growth guidance from 22%-24% to 32%-34%. Since the increased fees only applied to the second half of the year, they effectively doubled the company's revenue growth rate.
Through the first half of 2019, that strong revenue growth has continued: Revenue has jumped 38.3%, compared to just 20.2% growth in gross merchandise sales (the total volume of goods sold on the platform).
The end of an era
As the company laps the initiation of the new seller fees last July with its third-quarter report, due out Oct. 30, revenue growth is expected to decelerate. The company is targeting revenue growth of 28% to 31% for the second half, a solid clip that's still above its own gross merchandise sales forecast for 22% in the second half of the year.
However, the lack of growth from transaction fees not only slows down Etsy's revenue growth, but also has an impact on the bottom line, as the easy money from the higher fees is no longer there. That may be part of why the company barely expects adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to grow in the second half of the year -- it's forecast to increase only about 10%, compared to 65%. Wall Street is also not optimistic about profit growth, as it sees earnings per share slipping from $0.15 to $0.12.
Still, the investments made from the higher fees appear to be paying off: Growth in active sellers has accelerated, increasing 17.7% this year. That's up from single digits a year ago, a sign that those investments are drawing more sellers in spite of higher fees.
The shipping game
Etsy's other big move recently has been the launch of its free shipping program on orders above $35. No-cost shipping has essentially become table stakes in e-commerce. And Etsy, despite the uniqueness of its platform, competes directly with a range of retailers including Amazon and Target, many of whom have recently invested in their own infrastructure for fast and free shipping.
Etsy is making it easier for sellers to offer free shipping, and it's giving search priority to items that come with free shipping. The company has found that shoppers are significantly more likely to purchase an item in their cart if it ships for free, and management sees the move as a way to increase buyer trust and loyalty. Free shipping will be especially important with the holiday season coming, as online shopping spikes that time of year.
In most instances, it seems that buyers will pay the same cost, but the true price will be clearer, which the company believes will boost sales growth and help the brand.
In addition to free shipping, Etsy is laying the groundwork for growth with Etsy Ads, an improved unified ad platform that gives sellers the opportunity to drive more traffic and sales to their sites. And in August the company announced the $275 million acquisition of Reverb, an online marketplace for musical instruments; this shows the company is looking to mergers and acquisitions for growth.
While growth may take a step back as Etsy laps the impact of higher transaction fees, with free shipping and other initiatives in the works, it should continue to see solid growth ahead. For now, the business may need to catch up with the stock price, but Etsy appears to be moving in the right direction ahead of its third-quarter report.