Etsy (ETSY -1.25%) has opened up new avenues for artisans. A focus on community has attracted buyers and sellers, offering its clients advantages they would likely not find with Amazon or Shopify.
Given these benefits, it holds tremendous potential to deliver for current and future stockholders. Nonetheless, small investors might wonder whether a $10,000 position in the internet and direct marketing retailer could potentially turn a stockholder into a millionaire.
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Etsy's business
Etsy operates on its motto of keeping commerce "human." To this end, it has built a platform available only to artisans, craft suppliers, and vintage-goods sellers. But more than that, it has made these sellers into a community, one that has attracted sellers and buyers alike to the platform.
One of its more notable acquisitions last year was Elo7, which was dubbed the "Etsy of Brazil" before the takeover. This is significant since its biggest addressable market may lie in supporting artisan businesses in the developing world, sellers that would probably struggle to serve non-local customers without Etsy's help. This shows Etsy's commitment to serving these markets and could mean Etsy purchases similar companies in other developing markets in the future.
More importantly, such moves help Etsy capitalize on a fast-growing social commerce market. Grand View Research estimates this market will reach $3.4 trillion by 2028, a compound annual growth rate of 28%. With that market valued at $585 billion in 2021, this estimate points to significant returns new investors could earn over time.
Etsy's financials and its millionaire potential
However, with lockdowns ending in much of the world, e-commerce sales growth has slowed as customers return to offline shopping options. Etsy is not immune: Sequential revenue growth fell in the last two quarters. Moreover, Etsy's year-over-year revenue growth of 18% in the third quarter lagged Grand View's 28% estimate.
Nonetheless, Etsy grew gross merchandise sales (GMS) by 39% in the first nine months of 2021 compared with the same period in 2020. This took GMS to almost $9.3 billion. Further, Etsy's $1.6 billion in revenue in the first three quarters of 2021 represented a 45% increase compared with the same period in 2020.
As a result, Etsy earned a net income of $332 million in the first nine months of 2021, a 65% rise compared with the same timeframe in 2020. Still, in 2020 Etsy faced losses on extinguishment of debt, interest costs, foreign exchange, and income taxes amounting to more than $68 million. In 2021, Etsy did not have any debt extinguishment losses. It also benefited from foreign exchange, and a $5 million tax benefit helped offset more than $6 million in interest expenses. All of these factors boosted profit growth in 2021.
However, these charges hid Etsy's rising expenses in 2021. Etsy absorbed higher general and administrative expenses due to the Elo7 purchase and spent more on digital marketing. If not for the debt extinguishment, foreign exchange, interest, and tax expenses in 2020, net income growth would have more closely reflected the 23% increase in operating income.
The tech sell-off since November has also placed pressure on Etsy stock. Etsy has fallen by more than 35% since its peak at $307 per share in November, leaving only a 10% gain over the last 12 months. This has taken its market cap down to about $25 billion, well into the large-cap range.
Still, its P/E ratio now stands at 56. This is lower than social commerce companies Pinterest and Amazon, which both sell for approximately 64 times earnings. This points to Etsy's improving profitability and takes it to a lower valuation than its competitors, at least when measured against earnings.
Can Etsy turn $10,000 into $1 million?
Although Etsy appears poised for massive growth over time, it will likely not make small investors millionaires. At a $25 billion market cap, it would have to reach a market cap of at least $2.5 trillion, roughly the current size of Microsoft, to turn a $10,000 investment into $1 million.
Despite these struggles, Etsy is delivering revenue growth rates exceeding estimates for its industry. Moreover, the move into Brazil and the increased interest in the developing world point to a substantial addressable market. Small investors that buy Etsy stock and hold for the next decade may not become millionaires, but they could still see massive returns over time.
