E-commerce has been one of the defining trends of the last decade, and marketplaces like Amazon (AMZN +0.39%) and Etsy (ETSY 4.36%) have benefited greatly as sales have shifted online. Not surprisingly, that's translated into big gains for investors, with shares of Amazon and Etsy up 100% and 445%, respectively, in the last three years.
Even so, the e-commerce revolution is far from over. According to eMarketer, just 18% of all retail sales occurred online in 2020, and that figure will only reach 19.5% in 2021. That leaves plenty of room for these digital disruptors to grow. But which is the better buy, Amazon or Etsy?
Amazon
Jeff Bezos founded Amazon with a mission: to build the world's most customer-centric company. To that end, he helped pioneer e-commerce, bringing an ever-expanding shopping experience to consumers in the comfort of their homes.
Image source: Getty Images
So far, that strategy has worked well. Today Amazon is the second-largest retailer in the world, and the leading e-commerce platform in the United States by a wide margin. But Bezos didn't stop there.
To support its marketplace, Amazon built a fulfillment and logistics network that rivals the scale of carriers like FedEx. This vertical integration helps streamline shipping, control costs, and provide Prime members with one- or two-day delivery on over 100 million items.
Furthering the bull case, Amazon Web Services (AWS) is the global leader in cloud computing, with 37% market share, according to Canalys. Cloud services revenue comes with a much higher operating margin than retail sales, allowing the company to fund the growth of its e-commerce business in a way that most competitors can't match.
As a whole, Amazon's financial performance has been stellar in recent years.
|
Metric |
2017 |
Q1 2021 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$177.9 billion |
$419.1 billion |
30% |
|
Free Cash Flow |
$6.4 billion |
$21.8 billion |
46% |
Data source: Amazon SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rates.
Going forward, Amazon should benefit as e-commerce and cloud computing become increasingly popular. Moreover, the company's rapid growth positions it for further market share gains in both industries. From that perspective, despite a $1.6 trillion market cap, this stock still looks like a market-beating investment.
Etsy
Etsy operates a global marketplace for handcrafted and specialized goods. Its platform connects creative sellers with buyers looking for unique items. In fact, in a 2020 survey, 88% of buyers indicated that Etsy sells products they can't find anywhere else. Anecdotally, I've had a similar experience as an Etsy shopper myself.
Image source: Etsy
Unlike Amazon, Etsy doesn't compete against its sellers. Instead, the company generates revenue through marketplace fees (i.e. listings, transactions, and payment processing), as well as fees for optional services like on-site ads and discounted shipping labels. This better aligns the company with its sellers -- in other words, Etsy succeeds when its sellers succeed.
To that end, Etsy provides businesses with a dashboard to track orders, manage inventory, and draw insights about their performance. This tool also allows Etsy sellers to interact with buyers, which can help build lasting customer relationships. Again, this differs from Amazon's approach.
Last year, the pandemic-driven shift to digital commerce powered a record financial performance. Active sellers increased 62% to 4.4 million, and active buyers jumped 77% to 81.9 million. As result, Etsy's gross merchandise sales (GMS) surged 107% to $10.2 billion -- a meaningful acceleration from 27% growth in 2019.
Moreover, Etsy maintained that momentum in the first quarter of 2021 as GMS growth accelerated further to 132%, driving revenue of $551 million. For context, Etsy generated more revenue in Q1 2021 than it did during the entirety of 2017.
|
Metric |
2017 |
2021 Q1 (TTM) |
CAGR |
|---|---|---|---|
|
Revenue |
$441.2 million |
$2.0 billion |
60% |
|
Free Cash Flow |
$55.9 million |
$787.8 million |
126% |
Data source: Etsy SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.
Etsy has quietly become a significant player in e-commerce; it's the fourth-most visited marketplace in the U.S., and the eighth-most visited marketplace in Canada. But management sees greater success on the horizon, and expects the company's market opportunity to reach $437 billion by 2023, up from $249 billion in 2019.
Notably, Etsy is growing significantly faster than its market opportunity, an indication that it's gaining market share. That's why the future looks bright for this digital retailer.
The verdict
I like both of these businesses and I'm an Amazon shareholder, but I think Etsy is the better buy here. Its focus on unique and often personalized inventory has differentiated it from other marketplaces. And the company showed its mettle during the coronavirus, rising to the occasion when consumers needed face masks, while still managing to grow at an incredible pace.
While Etsy definitely serves a niche market, the company benefits from a sizable market opportunity, strong leadership, and a growth strategy that's been very effective so far.
