Legendary stocks like Berkshire Hathaway, Amazon, and Microsoft have turned an investment of a few thousand dollars into more than a million over the last two decades.
You can't go back in time and invest in these companies, but one mid-cap e-commerce company has the potential to generate similarly impressive returns. That company is artisan-based marketplace -- Etsy (ETSY +0.56%).
Etsy is a global e-commerce platform for handmade goods. Its marketplace offers a large variety of products and connects its community of sellers with millions of buyers around the world.
Solid growth metrics
While Etsy is an online marketplace, it does not compete with Amazon in a traditional sense. In fact, the company prides itself on being a unique platform for creative entrepreneurs all over the world.
In March 2019, Etsy targeted five-year annual GMS (gross merchandise sales) growth between 16% and 20%. In 2019, the company managed to increase GMS by 26.5% year over year to $4.97 billion. Comparatively, its revenue growth for 2019 was 35.6% at $818.4 million.
Image source: Getty Images.
Like most e-commerce players, Etsy also banks on the holiday season to drive sales. The company's top two GMS-driving days were Cyber Monday and Tuesday, when it experienced $20,000 in GMS per minute for those two days. In the five days between Thanksgiving and Cyber Monday, GMS rose 30% year over year.
Etsy is confident about the ongoing rapid growth of its top line. The company estimated its total addressable market at $250 billion, giving it enough opportunities to grow revenue long term. The company is an early mover in a market that is fast gaining popularity.
In order to gain customers, Etsy spends a lot on marketing and acquisition. In 2019, these expenses rose over 36% to $215.6 million, allowing the company to reach more buyers and helping it increase buyer frequency.
The number of active buyers on the marketplace more than doubled from about 22 million in 2015 to 46 million in 2019. Last year, the Etsy platform attracted 19 million new buyers, and GMS from those new buyers increased 11% year over year, making up 16% of total GMS.
Another key metric for Etsy is the number of repeat buyers. In 2019, about 41% of active buyers were repeat buyers, which was similar to 2018. The number of habitual buyers (users who spend $200 or more with purchases on at least six days in the last year) rose by 23% to 2.5 million last year. The growth in habitual buyers has accelerated for five consecutive quarters, a product of Etsy's successful efforts converting regular users into loyal customers.
What's going right for Etsy?
As mentioned earlier, Etsy is a marketplace for unique products. In its latest annual report, the company noted, "In a 2019 survey of Etsy buyers, 88% of buyers agreed that Etsy has items that you can’t find anywhere else." This puts it in an enviable position to expand its shopper base significantly in the next decade.
In Aug. 2019, Etsy acquired Reverb for $275 million in cash. Reverb is an online marketplace that offers new, vintage, and used musical instruments. The deal helped Etsy expand its product portfolio, and it now has over 66 million items for sale on the platform across various retail categories.
Etsy generated close to 70% of sales from domestic markets and has a considerable untapped opportunity in the emerging markets of Asia, Latin America, and Africa. Management is confident about the growing prospects of the unique goods segment within e-commerce, and it expects the total addressable market to reach $437 billion by 2023.
Going forward, Etsy aims to focus on creating a marketplace in its six core geographies and building a sustainable competitive advantage. It is one of the few e-commerce companies that is already posting healthy profit margins. Its adjusted EBITDA increased from $31 million in 2015 to $186 million in 2019, good for compound annual growth of nearly 57%. By comparison, GMS grew at an annual rate of just 20% in the same period.
Etsy ended 2019 with a cash and investments balance of $907 million and net debt of $785 million. With operating cash flow of $207 million that year, the company has enough room to make interest payments and invest in acquisitions and other initiatives to expand its product portfolio and user base.
The verdict
On April 2, management provided an update for the first quarter of 2020. The company confirmed that its GMS rose 32% year over year in the first quarter, despite concerns from the COVID-19 pandemic. However, this growth has been volatile -- while GMS rose 41% in the first two months of 2020, it was down 2% in the third week of March, for example.
Etsy also withdrew its guidance for 2020, given the circumstances. The company is confident its strong fundamentals will help it push through the short-term volatility. Management also believes its low fixed costs gives it the required flexibility to absorb a decline in sales.
Trading for the stock will also be volatile in the coming months. However, this should not deter long-term investors, given Etsy's expanding market opportunity, its leadership position within its niche, and the continued growth of both buyers and sellers on the platform. Etsy should be one of the top growth stocks of this decade.
