Shares of Etsy (ETSY -1.50%) popped Monday, rising 7.4% after the artisan-based online marketplace announced yet another acquisition. 

Etsy will take over Elo7, which it calls the Etsy of Brazil, for $217 million. The deal follows its acquisition of Depop, an online apparel resale marketplace targeted at Gen Z. The news further establishes Etsy as an operator of two-sided e-commerce marketplaces, rather than just its namesake brand. Elo7 will become the fourth component of its "house of brands" and gives the company a foothold in Latin America, a market that makes up just a small percentage of its sales today. Elo7 is currently the No. 6 e-commerce website in Brazil.

A person looking at a computer sitting on a couch.

Image source: Getty Images.

What is Elo7?

Founded in 2008, Elo7 has much in common with Etsy. Like Etsy, Elo7 has a similar mission to keep commerce human, and focuses on handmade and vintage goods. It has 1.9 million active buyers and 56,000 active sellers. Elo7 offers more than 40 retail categories on its website, including jewelry, home, and furniture. More than half of its gross merchandise sales come from special events and life moments, including weddings, babies, home decor, and children's parties, according to Etsy.

"Etsy has always been an inspiration and a reference for us, and we're excited to continue our growth journey as part of Etsy -- a company whose mission and culture so closely match our own," Carlos Curioni, Elo7's CEO, said. "We're looking forward to leveraging Etsy's product and marketing expertise to help the Elo7 marketplace, community, and team achieve our full potential in Brazil."

Elo7 will help open up a huge opportunity for Etsy in Latin America as e-commerce makes up less than 10% of retail in Latin America and is expected to grow by a compound annual rate of 26% through 2025, according to Euromonitor.

Elo7 is growing its top line at a rate similar to Etsy's. The deal is expected to be neutral to Etsy's revenue growth but modestly dilutive to adjusted EBITDA margin.

A smart long-term strategy

Much like the Depop acquisiton, The Elo7 deal looks like an excellent use of cash after Etsy's windfall last year. The company is building beyond its own namesake platform with an eye on long-term growth, targeting new verticals like apparel resale and new geographies like Latin America. As part of its strategic rationale for the deal, Etsy said, "Elo7 is an early stage business that we believe can leverage Etsy's proven value creation roadmap to drive further growth and profitability."

Part of the reason Etsy CEO Josh Silverman seems so confident in the company's house of brands portfolio strategy is that he has already been successful with it twice. The first time was when he came to Etsy in 2017 and turned around a business that had struggled since its 2015 IPO. Silverman cut costs, focused on the customer, invested in nuts-and-bolts areas like fast delivery and easy payments, and scaled up marketing once that infrastructure was in place. Management then pulled off a similar move with Reverb, the musical instruments marketplace it acquired in 2019 and which saw strong growth last year. 

After Etsy delivered triple-digit revenue growth for much of last year, it makes sense that management would find new ways to apply its successful model. Following the Depop acquisition, I predicted the Etsy shopping spree would continue, but I didn't expect it would strike another deal in the same month. 

At a price tag of $217 million, Elo7 is considerably smaller than Depop or Reverb but the growth stock's formula for adding new brands is the key consideration here. Etsy has a straightforward rubric to apply to making merger and acquisition decisions, eliminating the noise in what's usually a difficult decision.

With two deals in one month, management seems ready to pull out its wallet whenever opportunity knocks, and its success with Reverb shows that that's a wise move. Gross margin at the musical instruments market place improved from 33% in Q3 2019 when it was acquired to 53% in Q1 2021, while marketing efficiency also rose.

Given the success with the Etsy marketplace and Reverb and management's clear acquisition strategy, this won't be the last time Etsy scoops up a company like Elo7.