Etsy (NASDAQ:ETSY) just capped off a banner 2019 with record revenue of $818.4 million and nearly $5 billion in gross merchandise sales through its platform. But this online marketplace for one-of-a-kind handcrafted items is seeing decreased demand as consumers cut back on discretionary spending due to the coronavirus outbreak. Although the stock has rebounded from recent lows, it's still down 14% over the past year.
Let's dive into the business, its growth engines, and what management is doing in the face of current events to determine whether it's currently a buy.
The business is special
Etsy has a strong people-centric ecosystem that connects 46.4 million active buyers with 2.7 million active sellers. Shoppers are attracted to the millions of unique items available on the platform, 30% of which can be customized, and the one-to-one relationship buyers can have with a seller. On the flip side, sellers are attracted to the platform that's known for offering goods that 88% of buyers indicate they can't buy anywhere else.
A majority of its revenue (70.2%) comes from seller fees for listing items, transactions, and payments. The remainder is from optional value-added services for sellers such as advertising and discounted shipping labels. Revenue was up 35.6% in 2019, and management expected to clear the $1 billion milestone this year before the pandemic effectively shut down economies worldwide. The business is profitable, posting $96.0 million in net income for 2019.
The company estimates the market for its category of "special" retail goods to be $100 billion annually, growing to $170 billion by 2023. Compared to its $5 billion in gross merchandise sales, it has plenty of room to grow and several ways to do it.
Its platform has multiple growth levers
In its March 2019 investor day event, management discussed three primary ways it could drive growth. The first is to increase the number of active buyers. Its marketing team has developed a multi-pronged approach to reach potential consumers through better web-search capabilities, presence on social-media platforms, and television ads. Early results have been promising with the active buyer base growing 17.5% in 2019.
A second growth lever is to target the majority (59%) of Etsy customers who only make one purchase a year. An annual calendar of events and focused messaging throughout the year have been created to keep the platform top-of-mind and improve this metric.
Lastly, increasing the average order value is another engine for growth. The company is working to build a "frequently bought together" prompt for buyers and placing multiple products in a virtual room as you would see in a brick-and-mortar store. The efforts here are just getting started.
When the economy is healthy, these efforts should pay off, but what's happening in the face of the COVID-19 outbreak?
What about a coronavirus-driven recession?
The platform and its sellers are well positioned to survive the pandemic. Etsy's online "front page" has adapted to highlight goods such as DIY craft projects, everyday supplies, and hot sellers such as masks that should enjoy healthy demand even under current stay-at-home orders. Sellers, 91% of whom are individuals working from home, only need to stay healthy and have access to essential shipping services in order to continue operating. Some sellers are even focusing on the in-demand masks and hand sanitizers to help capture sales.
As for its cash flow and balance sheet, those are solid too. Over the past several years, the company has transitioned much of its costs to a variable structure, enabling it to more effectively reduce costs in a downturn. At the end of 2019, it had cash and short-term investments totaling $817 million that it's using to help sellers through this crisis by eliminating upfront ad fees, providing a grace period for paying bills, and increasing advertising to help drive more consumers to the site.
Management's previous revenue guidance has been scrapped and instead, the company shared a range of outcomes for investors in a recent business update. The most pessimistic scenario still has the company breaking even on an adjusted EBITDA basis for 2020 under the assumption its "worst week" of March sales continues through the rest of the year.
Investors should take comfort in the fact the company has the flexibility to survive an extended slowdown, but is the stock a buy today?
Etsy is a one-of-a-kind stock
Management is making smart moves to build on its strengths and solidify Etsy as the place to buy handcrafted items online. As a growth stock with an asset-light model, it sports a reasonably valued priced-to-sales ratio of eight times. The stock is a buy today for patient investors with a long-term view.
However, as its business depends on a healthy economy, it may take time for the stock to respond. When consumer spending does pick back up, it should get back to its targeted annual revenue growth rates of 16% to 20%. That impressive long-term goal should reward investors for many years to come.