Etsy (NASDAQ:ETSY) was still feeling growing pains as it established itself in its niche pre-pandemic. COVID-19, which has devastated many companies, was a real test of Etsy's maturity and ability, and the company passed with flying colors. Now that it's in the limelight, is there more room to expand?
A differentiated business
Etsy is an online marketplace for handmade and vintage items. If that sounds like too narrow a focus, you should check it out. Aside from the thousands of niche products, it features everyday items like pillows, paintings, clothing, and glassware. The company has even developed partnerships with influencers and designers to create exclusive collections, and customers can get one-of-a-kind (or at least one-of-a-few) creations they won't find anywhere else. The website itself has a contemporary design and is easy to navigate. In other words, it's what works in today's digital markets.
Etsy struggled for many years to find its spot in the global marketplace, but when Josh Silverman took over as CEO in 2017, he improved many of the site's features. This, along with a larger and more streamlined marketing campaign, helped tighten up operations and increase sales.
As a fully online marketplace, Etsy was poised to do well during the pandemic. Most notably, masks were a hot item, but sales as a whole took off over the past two quarters. Mask sales growth is actually declining while total sales are climbing, which is excellent progress.
How it's growing
The company stepped up its marketing, as well as communication with inactive buyers, bringing them back to make more sales. Management realized that happy customers weren't necessarily coming back, and they needed a gentle reminder about what Etsy could do for them. Active buyers grew 56% in the third quarter, and by 15 million over the past 12 months.
But Etsy gets most of its business from loyal customers, with 75% of purchases in the third quarter coming from buyers who joined before 2020.
Repeat buyers increased 7%, and habitual buyers increased 107%. So while new customers are an important element of its strong business, loyal customers are crucial.
At this point, Etsy is becoming more mainstream, despite its unique model. Silverman pointed out in an interview with CNBC that customers mention Etsy side by side with the likes of Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT), companies 50 to 100 times bigger than it is, and it has so much space to catch up.
"This is a moment when Etsy is really top of mind for millions of consumers and it's the perfect moment for Etsy to be leaning in and really investing in marketing," Silverman told CNBC's Jim Kramer.
Where to go next
Total company revenue was less than half a billion, a drop compared to what the companies Silverman mentioned bring in. With the company's outsize growth, there's a lot of space to fill. Etsy acquired Reverb, a musical instrument marketplace, last year, giving it even more opportunities to expand.
The nature of its model means that Etsy is already a global marketplace, and outside of marketing, there aren't many extra incurred costs to take the company all over the world. All growth is organic, making it an easily scalable model.
Etsy's stock has been very good to investors, gaining almost 200% just in 2020. It's trading at 70 times trailing-12-month earnings, which makes shares seem unreasonably expensive. But with great management, a winning and differentiated model, and a disciplined investment strategy, Etsy stock can still go way higher.