Online craft and vintage-goods marketplace Etsy (ETSY -1.60%) has wasted no time putting its newfound profitability to work. Amid a boom in e-commerce and hundreds of thousands of new sellers on its platform in the last year, Etsy has gone from a niche online selling platform to a top-of-mind shopping destination.
The company is expanding its reach even further, first announcing the purchase of fashion reseller Depop in early June, and then the purchase Elo7, Brazil's marketplace for handmade goods, shortly after.
After deploying its idle cash on these purchases, Etsy stock looks like a great value -- even more than before. Here's why.
1. It's a haven for the self-employed craftspeople of the world
Clothing and accessories are already a top sales category on Etsy, so Depop is a natural fit for the platform.
When music equipment marketplace Reverb was purchased a few years ago, it was a business with a low profit margin. But using Etsy's infrastructure, Reverb's financials have greatly improved. Gross profit margin on services rendered have gone from 33% in the third quarter of 2019 to 53% in the first quarter of 2021. Under Etsy, Reverb's growth has also outpaced that of the music equipment industry.
A similar dynamic could unfold with the purchase of Depop, giving Etsy not just a high-growth site for young people but also an increasingly profitable platform.
Elo7 will make a more dramatic splash, though. Etsy's sellers are from all over the world, but the vast majority of buyers are in the U.S., U.K., and Germany. Brazil represents a new major market for the company, and it's jump-starting its plan to enter South America's largest country and Latin America in general.
Elo7 has about 1.9 million active buyers and 56,000 active sellers on its platform and is a top 10 e-commerce site in Brazil. It's a small addition for Etsy (which reported 90.7 million active buyers and 4.7 million sellers of its own in first quarter 2021), but e-commerce is still in its nascent stage south of the U.S. In Brazil specifically, online shopping accounts for under 10% of total retail purchases, compared to some 20% here in the states.
2. It's putting idle cash to work
Etsy thus plans to extend its lead as a global site for craftspeople and other small businesses specializing in handmade items. Depop is being acquired for $1.625 billion -- a steep price considering the company generated just $70 million in revenue in 2020. But the value of merchandise sold on Depop grew at an average of almost 80% per year from 2017 to 2020, coming in at $650 million last year. As for Elo7, it's being bought for $217 million. Revenue and growth rates for Elo7 have not been provided, but I'd expect Etsy CEO Josh Silverman to disclose some details as it starts to make progress in this new market.
As of the end of March 2021, Etsy had cash, equivalents, and long-term investments of $1.8 billion, offset by debt of $1.3 billion. Subsequent to the end of the first quarter, the company raised another $1 billion in cash from the sale of convertible debt. After paying for Depop and Elo7, it will have somewhere in the ballpark of $950 million in cash and investments (excluding cash generated during the second quarter) and about $2.3 billion in debt.
It won't be as clean a balance sheet as it was a couple of months ago, but that cash wasn't doing a lot of good sitting idly on the sidelines. Depop is going gangbusters among Gen Z buyers (early 20-somethings and younger), and Elo7 is a brand new opportunity in a region where online shopping is just getting started.
3. It's a growth stock for a very reasonable value
Etsy said it expects second-quarter 2021 revenue to increase "only" 15% to 25% year over year, a rate some investors were disappointed with after the triple-digit pace set in the last year. But the fact that Etsy still sees such strong growth as it starts to lap the pandemic's online sales bump is encouraging. Adding Depop and Elo7 will only build on this growth trajectory (since both acquisitions were made after the first-quarter 2021 update).
I generally prefer companies that have net cash on balance, but Etsy should quickly find itself net cash positive again. The company generated $788 million in free cash flow through the 12-month stretch that ended March 2021 and is still expanding the top and bottom line. The stock has been rallying since the two acquisitions were announced, but still only trades for about 36 times trailing-12-month free cash flow.
I say that's a hot deal, especially considering the core Etsy marketplace is still growing, it's getting a fast-growing fashion reseller that's popular among young people with Depop, and the company is jump-starting its entrance into a new market in Latin America with Elo7.
Etsy is trading for a song right now when viewed against its proven track record in e-commerce and the massive opportunity that lies ahead.