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Is Etsy Stock a Buy?

By Jennifer Saibil – May 31, 2020 at 12:25PM

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The marketplace for handcrafted products has seen soaring sales throughout the pandemic, but is the stock already priced too high?

Before its stock exploded, Etsy (ETSY 4.96%) was mostly known to the world of DIYers (like me) who loved the ability to get supplies easily and purchase custom gifts while supporting other hobbyists. Enter the IPO in 2015, and now Etsy has become mainstream as investors realize the company's incredible potential for growth.

But as shareholders have pushed the price up, is it still time to buy?

A sort-of unique platform

Etsy is a marketplace that connects professional crafters with customers. It doesn't take care of any fulfillment, but it does manage marketing. And though the company sells no products of its own, it produces revenue from fees charged to member sellers. While it's certainly not the world's only internet marketplace, it has carved out a special niche in the DIY category and has a core group of loyal customers. 

As the world becomes a smaller place, and sellers and buyers interact globally, Etsy has made it simpler for transactions to take place. COVID-19 is only speeding things along as people rely on e-commerce to function, and online businesses have been further pushed into the spotlight as they rise to the challenge. Etsy focuses on unique products that help it stand out from other marketplaces, and while people are stuck at home during the pandemic, customers have been loving what the company offers.

A craft table viewed from above as someone makes face masks out of various fabrics

Image source: Getty Images.

Pushing out in all directions

The obvious way for Etsy to grow is by expanding its base of buyers and sellers with revenue growing in tandem. In the first quarter, active buyers grew 16% to 47.7 million, while active sellers surged 26% to 2.8 million. Seller growth began to outpace buyer growth in the 2019 third quarter, and that's something to keep an eye on.

The company has also focused on increasing sales per customer, and the "habitual shopper" category is growing faster than the broader buyer group at 23% in 2019. This loyal cohort comprises shoppers who spend $200 or more and also make purchases on at least six days over the past 12 months. As of this writing, there are 2.5 million habitual shoppers, making up about 5% of all active buyers. Growing that group is important to the company as existing customers cost less to attract than new ones. It's easier to target these habitual shoppers who are already familiar with the platform than seek out new buyers.

Etsy is growing in other ways as well, such as moving into vintage and one-of-a-kind pieces that complement its product line. It has also expanded via acquisition, having taken over secondhand musical instrument marketplace Reverb in 2019.

All of this has had a very positive impact on the company's top line. During the first quarter, which ended on March 31 and included the very beginning of the U.S. response to COVID-19, gross merchandise sales (GMS) grew 32% year over year to $1.35 billion, while revenue increased 35% to $228.1 million. Net income dipped, though, as Etsy continues to invest in marketing and product development.

This comes off of a very successful fiscal year in 2019, with a 36% increase in revenue and a 26% increase in GMS.

What we can expect in the next few years

Etsy's operational efficiencies were highlighted during the pandemic as the company urged sellers to meet the demand for face masks, resulting in 100% sales growth in the month of April, driven by mask sales. But masks only contributed a portion of the outsized growth, as non-mask sales grew 79%. CEO Josh Silverman said, "While there was no playbook for this situation, we moved with agility, focus, and purpose to support the Etsy global community and live up to our mission."

Even after the pandemic-fueled shopping craze ends, the average consumer is becoming more comfortable with the advantages of shopping online, and Etsy is positioned to benefit from that trend. The company is expecting revenue to continue surging in the second quarter 70% to 90%.  That might be growth that's difficult to maintain long term, so the question becomes how long can the company keep it up? This hinges on how many of the recent customers can be converted to regular shoppers on its platform and whether Etsy can find other horizontal growth opportunities.

Etsy stock has been volatile since its debut in 2015 after dealing with (unsuccessful) competition from Amazon and the ouster of its CEO. As of this writing, it has surged 67% year to date after after falling 7% last year. The forward price-to-earnings ratio is 55 -- while high, it may be justified given the expected growth. So if you have the stomach for some continued volatility, Etsy is an attractive play on the growth of e-commerce worldwide.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Etsy and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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