Better Buy: Etsy vs. Wayfair

With the coronavirus still keeping many at home, e-commerce is booming, and online retailers Etsy (ETSY 1.27%) and Wayfair (W 2.04%) have benefited from the recent surge. Both saw 80%-plus year-over-year volume increases at the beginning of the second quarter, which have helped boost both stocks to a triple-digit gain year to date.

As the pandemic continues to drive more purchases online, both companies stand to benefit, but which is the better buy today? Let's look at the key metrics side by side and make the case for each company to help reach a decision.

Stock prices year to date versus S&P 500 through July 21, 2020. ETSY data by YCharts

A comparison of key metrics

Comparing the companies' key metrics highlights the difference between their two business models. Starting at the top, you'll notice that Wayfair's revenue for selling its home goods significantly exceeds that of Etsy. This is because it records revenue based on the value of the items it sells, whereas Etsy's handmade craft marketplace revenue only comes from the fees it collects from its sellers to use the platform.

Note: YOY=year-over-year. TTM=trailing-twelve-months. *Wayfair's cash includes a $535 million capital raise after the end of Q1. Data from earnings reports and Yahoo Finance. Table by author.

Both had impressive 2019 YOY revenue gains in the mid-30% range, but Wayfair's growth slowed in the first quarter as it strategically pulled back on advertising spend to move toward a more sustainable free cash flow model.

Wayfair's gross margins are boosted by the fees it captures from its suppliers for its warehousing and fulfillment services. Etsy's balance sheet has less debt, and its cash flows are better, which is due to Wayfair's significant investments in its distribution and logistics infrastructure over the past several years.

Now that you have a bit of a high-level overview, let's look more closely at the case for each stock.

The case for Etsy

Etsy serves as a place for 2.8 million artisans to sell their unique handcrafted goods online. Its website features 66 million items and has attracted 47.7 million buyers who have made a purchase in the last 12 months. Revenue comes from fees sellers pay Etsy as a cut of each sale transaction and from utilizing its shipping and advertising services.

With families stuck at home due to coronavirus, e-commerce is booming. Image source: Getty Images.

Etsy's growth has been impressive, growing 35% in 2019 on the back of a 42% revenue gain the previous year. Gross merchandise sales on its website have increased by 53% since 2017, to $4.9 billion for full-year 2019, and annual spend per active customer has increased 6% over that period to $104. It has plenty of room to grow as it looks to the $249 billion annual spend in the retail categories and geographies it serves.

The company and its sellers have thrived during the pandemic. Tens of thousands of its sellers responded to meet the demand for coronavirus masks and sold 12 million masks in the month of April. This example shows the resilience of this platform, where 91% of its sellers are individual proprietors working from home who have largely been insulated from the pandemic.

The case for Wayfair

Wayfair is a collection of brands that provide over 12,000 suppliers with an online store to sell home goods to its 21 million active buyers. It also has a distribution and logistics network to provide a more full-service offering to its suppliers, reduce costs, and improve its customers' delivery experience.

Like Etsy, Wayfair's 2019 year-over-year growth of 35% followed its 2018 year-over-year growth of 44%. Its easy-to-use website and focus on the customer experience have increased the number of active buyers 8.8 times over the last five years and increased their average spend per year by 39% to $449. It's built a loyal following, as more than 70% of its orders are from repeat customers in its most recent quarter.

The company is under operating in an underpenetrated online space, with only 14% of home goods purchases made online in 2019 versus 30% for apparel and 43% for electronics. The company has a long runway of growth as it looks to compete with brick-and-mortar retailers for the more than $600 billion spent annually on home goods in the U.S. and Europe.

Which is the better buy?

Both of these online players have built impressive businesses, and each has a huge runway of growth ahead. Both stocks are close to all-time highs due to high expectations for the coming quarter, but investors should look beyond those results. Even though Wayfair expects to have a solid upcoming quarter, it will be more challenged to maintain its share price momentum. 

As evidenced by its Q1 results, Wayfair's growth is highly dependent on advertising. As it cuts back ad spend toward its goal of positive free cash flow, it will be difficult for the company to maintain the high growth rates needed to justify the run-up in its stock. If there's an extended recession, its growth could be further hampered, especially since Wayfair's customers annually spend four times more than Etsy shoppers and would be more likely to cut back on these large purchases. 

Until Wayfair can figure out the right balance of investing for growth and consistently delivering on its bottom line and cash flows, Etsy's cash-flow positive, profitable, and faster-growing asset-light business model makes it the better buy.