Beginning investors often dream of finding the stock that turns into the next Amazon or Tesla. While recognizing such names early is no easy task, one strategy involves finding relatively new companies that have already made massive gains and hold the potential for more growth. Etsy (ETSY 0.49%) and Wayfair (W -3.72%) are two internet and direct marketing retail stocks that appear positioned to fit that description.
Etsy
At first glance, Etsy may look like a Shopify for the arts and crafts industry. However, more than acting as a mere software platform, Etsy created a community that bolsters small businesses while helping buyers find the products they need. Artisans, craft suppliers, and sellers of vintage goods can start an Etsy site, paying as little as $0.20 per listing. From there, Etsy provides a search tool to lead interested buyers to their products.
Investors have reaped the benefits. Stockholders who invested $1,000 when Etsy fell below $30 per share in March 2020 would hold a position worth nearly $6,600 as of the time of this writing.
This value proposition helped Etsy grow to more than 5.2 million sellers, a 67% increase year over year. The U.S. now accounts for most of its sellers, though it has built a significant following in the U.K., Canada, Australia, and Germany. Moreover, Etsy just bought Elo7, which many regarded as the "Etsy of Brazil." Moves into Brazil and other developing countries could take the seller count much higher over time.
Its growth has taken revenue to almost $1.1 billion in the first half of 2021. This represents a 64% increase from the first half of 2020. Net income surged 122% during the same period to $242 million as the cost of revenue and operating expenses grew at a slower pace than revenue.
Like many e-commerce companies, Etsy did not guide beyond the third quarter, and the approximate 13% increase in revenue year over year points to slowing growth. The company expects it will again have to compete with offline businesses that closed due to the pandemic and have now reopened. On the Q2 2021 earnings call, the company also noted that its wedding business increased in Q2, so other niches have prospered due to reopenings.
However, once COVID-19 ceases to affect Etsy's business, annual revenue growth should more closely resemble the 35% rise experienced in 2019 before the pandemic. Furthermore, at a 57 price-to-earnings ratio, it remains significantly cheaper than Shopify's 75 multiple. Such a value proposition should continue to attract both sellers and stockholders to Etsy.
Image source: Getty Images.
Wayfair
Wayfair is an online furniture and home goods company. The company has invested heavily in building a fulfillment network that could ship bulk goods such as furniture. It also utilizes machine learning and 3D modeling strategies to its benefit, helping customers find desired items through visual search.
One might think that Amazon, which often contracts with third parties to ship furniture and other bulk items, could simply take away its customers. Still, the fact that 76% of its volume consisted of repeat orders shows it has built a loyal following. That loyalty likely played a role in turning $1,000 worth of Wayfair stock bought in March 2020 into a position worth more than $13,000 today.
Financially, it has also maintained its growth. Revenue for the first six months of 2021 came in at just over $7.3 billion, 11% higher than year-ago levels. It has also earned $149 million during that time as it limited the increase in operating expenses to 5% and reduced interest expenses.
However, this included a 10% drop in second-quarter revenue from year-ago levels. On the Q2 2021 earnings call, CFO Michael D. Fleisher cited an increase in offline activity following a reduction of COVID-19 cases in the spring and early summer as the reason for the drop. Still, while the company issued no forward guidance, Fleisher expects a "sequential improvement in revenue trends" as people return to regular school and work routines. Such a change could help justify its P/E ratio of 90.
Additionally, its price-to-sales ratio stands at two, well under Amazon's P/S ratio of four. Investors should also remember that revenue grew 55% in fiscal 2020 compared to 2019, taking the company to its first full-year profit. This indicates that even if Wayfair pauses in the near term, it will probably resume its move higher once the economy moves past the pandemic.
