At first glance, one might think of Etsy (ETSY 4.98%) as merely a sales platform like Shopify where artisans happen to congregate. However, those who view Etsy as only sales software overlook a more profound competitive advantage that has drawn sellers, buyers, and stockholders alike. As Etsy continues to realize more of this potential, it has transformed its stock's value proposition.
Why Etsy is more than "Shopify for artisans"
Etsy defines itself as a "vibrant community of real people connecting over special goods." The site connects sellers with millions of buyers interest in its specialized products.
Moreover, Etsy will not let anyone sell on its platform. To get on, one must sell handmade goods, vintage products, or craft supplies. Etsy will help its sellers set up a website, arrange billing, and even help resolve billing disputes should they arise.
Furthermore, it also provides more unusual benefits such as acting as a lobbying group, working to guard the political interests of independent sellers. This gives the small businesses it represents a huge benefit as most sellers would not otherwise have resources for such advocacy.
Additionally, Etsy offers a specialized search tool to help buyers and sellers find one another. A buyer can search for items based on keywords, using query matching and ranking to help link buyers to products that they seek. Price, size, and item type (meaning handmade or vintage) are some of the criteria Etsy uses to help link buyers and sellers.
This approach has produced results. In 2020, the number of active sellers rose 62% to almost 4.4 million. During the same year, 81.9 million buyers made a purchase on the site, a 77% increase from 2019 levels. These buyers purchased $10.3 billion worth of merchandise, a 107% surge over that same period.
Not surprisingly, these sales increases also boosted Etsy itself. In 2020, it earned just over $1.7 billion in revenue, a 111% rise year over year. This important number has resulted in $349 million in net income, 264% more than in 2019. During that time, the cost of goods sold moved higher by only 71%, though the company increased its marketing spending by 132%. Still, all other increases in expenses came in far below the percentage gain in revenue, leading to a massive spike in net income.
Also, Etsy produced free cash flow of just under $678 million. The company spent $58.3 million on interest and other expenses such as extinguishing debt and foreign exchange. While long-term debt increased by $264 million, this came from a change in accounting standards. With a debt level of $1.06 billion, the current level of free cash flow should keep this liability manageable.
Projections for future income remain scant, with the company only making projections through the first quarter. On the Q4 2020 earnings call, CFO Rachel Glaser said the company would not provide its usual annual guidance due to "uncertainties." Glaser did not elaborate. However, with many physical stores closed amid the pandemic, e-commerce witnessed a dramatic surge in 2020. That will likely not repeat in 2021, making management reluctant to provide 2021 guidance. Still, with a revenue increase of 125%-135% predicted for Q1, growth appears to remain robust.
Also, investors have taken notice of Etsy's prosperity. Its stock has increased by about 420% over the last 12 months. Nonetheless, with no net increases in the stock price since mid-January, growth has taken a breather.
For now, Etsy supports a P/E ratio of about 75. This places the earnings multiple in line with its historical P/E ratios. Also, with revenue growth likely staying above 100% for the foreseeable future, the valuation appears reasonable.
Should investors buy Etsy now?
Thanks to its competitive advantages for sellers and interested buyers, Etsy continues to prove its value proposition. While the lack of willingness to make projections creates some concern, neither feedback from the company nor the results point to any hint of a long-term slowdown. Moreover, with a reasonable valuation relative to growth, this consumer discretionary stock will likely continue to yield shareholder returns over time.