Outside of an identity as tech stocks, Etsy (ETSY +3.28%) and DigitalOcean (DOCN +2.66%) appear to have little in common. One has built a niche in the e-commerce space, while the other offers cloud infrastructure services. Despite differing businesses, both also happen to compete with Amazon (AMZN 0.41%).
However, both Etsy and DigitalOcean took a remarkably similar approach in challenging the tech giant. Moreover, they have succeeded to such a degree that picking one as the better disruptor requires a closer investigation.
Image source: Getty Images.
What Etsy and DigitalOcean have in common
Beyond their businesses, Etsy and DigitalOcean offer some intriguing commonalities. Both companies serve small and medium-sized enterprises. They also provide transparent and affordable pricing that draws such companies. Etsy will allow vendors to sell products on its site costing as little as $0.20. Although DigitalOcean's pricing is not quite that low, it follows Etsy's example of "simple, predictable pricing," allowing businesses to buy only the services they need at a low price.
NYSE: ETSY
Key Data Points
Interestingly, they have taken the same approach to competing with Amazon -- building communities. The Etsy community, which serves both buyers and sellers, is one benefit that has users talking about Etsy stock. Buyers know they can find artisan and vintage products as well as craft supplies. This target market attracts the appropriate businesses, and Etsy has made its site more attractive by offering a specialized search engine to link sellers to interested buyers.
DigitalOcean has also built a network of IT users. Many of the businesses it serves employ one IT worker. DigitalOcean's community links these lone workers, helping them network with other IT professionals to resolve issues more easily.
Moreover, of the two companies, DigitalOcean may hold a slight advantage from the standpoint of total addressable market for the industry it operate in. Grand View Research estimates that the global cloud infrastructure business DigitalOcean operates in will grow at a compound annual growth rate (CAGR) of 16% through 2030. In comparison, it predicts a 10% CAGR for the e-commerce business Etsy operates in through 2028.
How Etsy and DigitalOcean compare financially
However, investors also need to consider the individual stocks, though each company appears to serve its investors well. In 2021, Etsy reported $2.3 billion in revenue, a 35% increase over 2020. Additionally, its gross profit of just under $1.7 billion gave Etsy a 72% gross margin. This led to $494 million in net income, a 41% increase from year-ago levels. Though operating expenses grew 45%, an income tax benefit helped income grow faster than revenue.
NYSE: DOCN
Key Data Points
Unlike Etsy, DigitalOcean is not profitable. Still, its revenue of $429 million grew 35% year over year, matching Etsy's revenue growth rate. Also, its gross profit came in at $258 million, meaning its 60% gross margin slightly lagged Etsy's.
Admittedly, both companies are in different places in their development. Etsy stock debuted in 2015, and its $19 billion market cap makes it slightly three times larger than the size of DigitalOcean's $6 billion market cap, a stock that launched its initial public offering last year.
Also, over the last five years, Etsy stock is up about 1,060% compared to the 260% increase in Amazon. The S&P 500 approximately doubled in value during that time. However, DigitalOcean stock has outperformed Etsy and Amazon since it debuted on March 24, 2021. Though the comparison period is relatively short, such a move points to its potential to move higher.
DOCN data by YCharts
Nonetheless, investors will pay more for that growth. DigitalOcean sells for about 14 times sales compared with the price-to-sales (P/S) ratio of around 10 for Etsy.
Etsy or DigitalOcean?
In reality, both companies are winners. Through building user-based communities, they have disrupted Amazon successfully and their stocks continue to beat the S&P 500 as a result. Given their small sizes and continuing increases, these stocks should continue outperforming the indexes over the longer term.
However, if choosing one, I give a slight edge to DigitalOcean. DigitalOcean operates in a faster-growing industry, and the stock appears to reflect that increase well. That growth and its smaller size may provide the cloud stock an advantage as it makes the cloud more accessible to small businesses.
