Chewy (CHWY -2.54%) and Etsy (ETSY -0.22%) are both niche e-commerce players that have thrived in the shadow of Amazon (NASDAQ: AMZN). Chewy, which was founded in 2011, sells food, drugs, and other products for pets online. It was acquired by PetSmart in 2017 and spun off in an IPO in 2019. Etsy, which was founded in 2005, is a leading online marketplace for artisan-produced handmade and customized products.
Both stocks hit their all-time highs during the buying frenzy in growth and meme stocks in 2021. But today, shares of Chewy and Etsy trade roughly 70% and 65%, respectively, below those record levels. They both lost their luster as investors fretted over their slower sales in a post-pandemic world and the effect of inflation on consumer spending. Rising interest rates also drove investors from growth to value stocks. Should investors buy either of these out-of-favor e-commerce plays today?
Image source: Getty Images.
What happened to Chewy?
Chewy's revenue rose 14% to $10.1 billion in fiscal 2022 (which ended in January 2023), but that represented a slowdown from its 24% growth in fiscal 2021. However, its gross margin still expanded 130 basis points to 28% as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin rose from 0.9% to 3%. Its adjusted EBITDA increased 289% to $306 million for the full year.
Chewy attributed that margin expansion to its supply chain improvements, its persistent pricing power, and its sales of higher-margin products. It expects that expansion to continue this year as it rolls out its Chewy Health insurance plans for pets, launches more private label brands, and sells more sponsored ads across its marketplace.
Chewy ended fiscal 2022 with 20.4 million active customers, which represented a 1% decline from fiscal 2021. However, it offset that sluggish customer growth by growing its average net sales per active customer by 15% to $495 for the full year.
Amazon has been trying to challenge Chewy with its own private label pet products over the past five years, but it failed to throttle Chewy's growth. In fact, nearly 60% of Chewy's current customers joined its platform over the past three years.
For fiscal 2023, Chewy expects its revenue to rise 10% to 12% as its adjusted EBITDA margin comes in "flat to down 50 basis points." It attributes that slight margin contraction to its international expansion and other growth-oriented investments. Analysts expect its revenue and adjusted EBITDA to increase 11% and 3%, respectively.
What happened to Etsy?
Etsy's revenue rose 10% to $2.6 billion in 2022, which also represented a slowdown from its 35% growth in 2021. Etsy only facilitates transactions between third-party sellers and customers without taking on any inventories, so it operates at much higher margins than Chewy, which needs to take on its own inventories as a first-party retailer.
But as Chewy's margins expanded, Etsy's contracted. In 2022, its gross margin fell 80 basis points to 71% as its adjusted EBITDA margin shrank from 31% to 28%. That contraction was mainly caused by three big acquisitions: The musical instruments marketplace Reverb in 2019, the U.K.-based fashion resale marketplace Depop in 2021, and the Brazilian artisan marketplace Elo7 in 2021. All three of those smaller marketplaces generated lower-margin revenues relative to Etsy's namesake marketplace. As a result, its total adjusted EBITDA stayed nearly flat at $717 million.
In 2022, Etsy's active buyers fell 1% to 95.1 million as its active sellers dipped 1% to 7.5 million. That slowdown was caused by tough comparisons to the pandemic, declining sales of handmade masks, and the lapping of its acquisitions of Depop and Elo7.
Amazon has also been coming after Etsy ever since its launch of its Handmade marketplace in 2015. But just like Chewy, Etsy survived Amazon's assault and continued to lock in more merchants and buyers. It also continued to grow its take rates (the percentage of each order it retains as revenue) by raising its merchant fees, driving more orders through its own payments platform, and selling more promoted ads.
Etsy didn't provide a precise outlook for 2023, but analysts expect its revenue and adjusted EBITDA to rise 8% and 7%, respectively. Its adjusted EBITDA margin is expected to stay nearly flat at 28% in a challenging macro environment.
The valuations and verdict
Based on their current enterprise values, Chewy and Etsy trade at 47 times and 18 times this year's adjusted EBITDA, respectively. Investors seem willing to pay a premium for Chewy's recession-resistant business of selling pet products online, but they aren't as bullish on Etsy's chances of withstanding an economic downturn.
I wouldn't rush to buy either of these e-commerce stocks right now. But if I had to choose one over the other, I'd pick Chewy because its core business seems evergreen, its moat is wider, and its margins are all headed in the right direction.
