E-commerce has gotten a serious shot in the arm this year. According to the U.S. Census Bureau, online store sales have increased over 18% through the first half of 2020, doing some serious heavy lifting to offset the 3.4% overall decline in retail sales compared to the first half of 2019.
What is particularly astonishing to me is that even with the massive shift, the Census Bureau figures imply that less than 20% of shopping is done via the internet. With COVID-19 altering consumer behavior, rendering many businesses redundant, and accelerating technology trends, I think e-commerce will continue to grow at a rapid pace this year and for many more years to come. Etsy (ETSY 3.36%) is thus at the top of my buy list in August.
A relative value to its peers
Etsy stock soared after providing an update on the first three months of the year. The online marketplace for craftspeople reported $1.35 billion in gross merchandise sold (GMS) on its platform, up 32% year over year, leading to a 34% increase in revenue to $228 million. But business accelerated in late March and into April as the economy went on lockdown. The variables are wide-ranging, but management said to expect a year-over-year 80% to 100% increase in GMS and 70% to 90% increase in revenue for the second quarter -- which will be reported on Aug. 5.
Given the advance of e-commerce overall, as well as the report from e-commerce software firm Shopify (SHOP 0.39%) which showed that its merchandise value sold was up 119% in Q2, Etsy will likely meet its targets. However, even after Etsy stock has ballooned 150% higher so far this year, I think it's a relative value. It trades for 9.3 times one-year forward expected sales compared to a mind-boggling 41 times expected sales for Shopify. Granted, Shopify could have greater long-term potential, as it has been investing heavily in credit services and logistics infrastructure to support its small business customers. But that in no way diminishes Etsy's own long-term potential for helping the world's craftspeople get their wares listed online.
Additionally, Etsy is profitable. As a high-growth outfit that continues to funnel funds into new initiatives, that's a significant achievement. Over the last year, the online marketplace retained $190 million in free cash flow (basic profits measured as revenue less cash operating and capital expenses) on revenue of $877 million -- good for a free cash margin of nearly 22%.
A marketplace for the self-employed
All of those figures are for the here and now, but I like Etsy's prospects over the next decade. The company is at the crossroads between growing e-commerce here and abroad, and a shift in the makeup of the workforce. Self-employment and entrepreneurship supported by the internet has been on the rise, and now faced with unemployment due to the pandemic, many more people are instead opting to start building something for themselves.
Etsy's marketplace is a good fit for many, and it has proven itself to be a good partner for the more than 2.8 million active sellers using its services. That was on display in the first quarter, when Etsy was able to mobilize some 60,000 of its sellers to produce masks, with $133 million worth of face masks sold in April alone. The e-commerce platform rose to meet the challenge of providing a high-demand product, and helped thousands of its merchant partners keep their income flowing in an incredibly difficult period.
It's anecdotal, but I think it demonstrates the power of e-commerce -- both in its flexibility to meet consumer needs and in support of a burgeoning tool for entrepreneurial empowerment. With shares trading for a relative value to some other high-flying peers, Etsy is my top buy in August as the online marketplace helps the world make the migration to digital-based commerce.