Esty (NASDAQ: ETSY), an online marketplace, really irked its sellers a few weeks ago when it announced that it is increasing sellers' its fees by a whopping 30%. Investors also raised serious questions -- why would Etsy raise its fees in a time of such dire economic uncertainty, and jeopardize its growth prospects? Many investors may choose to stay away from Etsy over these concerns, but for long-term investors that can prove to be an ill-advised decision. Here's why.
Is Etsy upsetting the applecart?
Etsy has become a go-to place for over 90 million customers. The company operates a two-sided online marketplace that connects buyers and sellers around the globe. Etsy separates itself from the mass e-commerce retailers by focusing on unique and hand-crafted goods that customers just can't get anywhere else. The distinctive and superior-quality goods on Etsy's website attract more and more buyers, who in turn entice more sellers to the platform, creating a virtuous circle. Sellers -- the talented independent creators, artists, and entrepreneurs who feed the imaginations and aspirations of millions of buyers -- are central to Etsy's success.
Image source: Getty Images.
Alongside its Q4 2021 results, Etsy announced on Feb. 24 that it is raising its seller transaction fees -- the percentage of the revenue the sellers pay Etsy for each sale -- from 5% to 6.5% beginning April 11. That's a massive 30% increase, on top of multiple other fees the sellers pay to Etsy:
- Listing fee: $0.20 for each item listed on Etsy's website
- Payment processing fee: 3% of the sale plus $0.25 per transaction
- Advertising fees: To advertise on Etsy.com, or other websites (optional)
- Shipping fee: To ship goods to buyers (optional)
To nobody's surprise, Etsy's move upset its sellers. Considering the importance of the sellers to Etsy's business, investors are also wondering if Etsy's decision will cause its sellers, the backbone of Etsy's business, to leave the platform and hurt the business.
One way for sellers to relieve the burden of growing selling costs is to raise prices, and pass the added cost on to the buyers. How will those buyers, who are already paying up for the unique goods on Etsy's platform, react to even higher prices in this environment of growing economic uncertainty? People are already feeling the heat of rising costs of daily essentials amid high inflation and supply chain bottlenecks. The stock market has taken a major beating over the past three months. There's even talk of an impending recession. Many investors are really worried that consumers will start tightening their purse strings, ultimately impacting Etsy's business.
NYSE: ETSY
Key Data Points
A unique marketplace with strong competitive advantages
Etsy has created a platform that helps entrepreneurs and artists realize their dreams of building viable businesses. In a digital-first world, Etsy removes the hassles of creating websites, and setting up processes essential to reach and transact with customers. Furthermore, the sellers get to showcase their products in front of an established audience, as opposed to having to build a customer base from scratch.
Etsy believes the incremental revenue it'll generate from the higher seller fees will allow it to invest in key areas: improving its customer experience, developing additional tools for sellers, and marketing. The company has previously demonstrated its ability to make such improvements, which have directly translated into more sales to its sellers and attracted more sellers to the platform.
Chart by author. Source: Etsy financial statements.
What's particularly noteworthy in the numbers above is that Etsy accomplished that growth right after it increased seller transaction fees from 3.5% to 5% in 2018. The company subsequent success suggests that Etsy can invest capital astutely and create value for its sellers.
Etsy has executed exceptionally well under the leadership of CEO Josh Silverman, with outstanding 2021 results. Comparing Etsy's 2021 results to its 2019 performance offers greater insights in the company's progression, rather than comparing the results to 2020, an outlier of a year that produced inflated results for online marketplaces from a once-in-a-lifetime event of COVID-19 pandemic. Since 2019, Etsy has almost doubled the number of active buyers on its platform -- buyers who made at least one purchase in the past 12 months -- to reach 90 million. Buyers are also spending more on their Etsy purchases. Average spend for active buyers grew from about $98 in 2019 to $136 at the end of December 2021. More buyers and more spending have translated into $2.3 billion in revenue for fiscal year 2021, up 184% from 2019. Finally, Etsy has been growing profitably, which shows the resilience of its business model. For fiscal 2021, the company recorded a net income margin of 21.2%, and free cash flow margin of 27.4%. This means Etsy is converting more than a quarter of its revenue into cash even after it's paid all its essential bills.
Beyond its core marketplace, Etsy has been expanding its growth avenues by building its "House of Brands" -- a collection of diverse online marketplaces -- which currently includes Reverb, a marketplace for musical instruments, Depop, a marketplace for apparel resale, and Elo7, a Brazil-based marketplace for unique handmade items. The company believes it has a $466 billion market opportunity for online sales, and that opportunity expands to $2.0 trillion when expanded to offline. With its current revenue of $2.3 billion, Etsy is not even scratching the surface of its opportunity, and has a tremendous runway in front of it.
Increased sellers' fees may look like a headwind at initial glance, but Etsy has produced outstanding results for its sellers and investors with its deft execution. And even after the increase in seller fees, Etsy still offers a significantly more attractive option relative to its key competitor, the Amazon Handmade marketplace from the retail giant Amazon, who charges a much higher 15% flat fees to its sellers.
Time to go shopping?
In the backdrop of economic uncertainty, Etsy's decision to increase sellers' fees may discourage investors, who may choose to stay away from the company. Macroeconomic events and short-term movements in the stock market are very difficult to predict. Sure, there could be some headwinds for Etsy's business in the near term, but the company still expects to grow its first quarter 2022 revenue by mid-single digits year over year, which is impressive. For all the reasons discussed above, Etsy is a resilient business, and will likely reward investors handsomely over the years to come. Market is offering a 60% discount on Etsy's stock price from its all-time high in November 2021. For patient long-term investors, now could be a nice opportunity to take a small position in this excellent business as part of a well-diversified portfolio.
