Sometimes you have to move on from a stock. Etsy (ETSY 0.34%) has unfortunately fallen into this category for me. Instead, I have my eyes on a much better option: Airbnb (ABNB 0.75%).
So why am I moving on from Etsy to Airbnb? It all has to do with how each company has grown recently.
Etsy's sales appear to have plateaued
Etsy's growth story is a bit of a mixed bag. Two measures define how it is doing: Gross merchandise sales (GMS) and revenue. GMS tells investors how much product is sold on Etsy's platform, while revenue conveys how much of the GMS it captures for itself.
While revenue has risen, GMS has stayed relatively steady over the past four years.
| Q3 Year | GMS | Revenue |
|---|---|---|
| 2020 | $2.63 Billion | $451 Million |
| 2021 | $3.10 Billion | $532 Million |
| 2022 | $3.00 Billion | $594 Million |
| 2023 | $3.04 Billion | $636 Million |
Data source: Etsy.
Etsy's revenue rise has come from increasing its take rate from sellers as well as its rising advertising business. However, there's only so much juice to squeeze from the custom goods market Etsy services. This is evidenced by GMS's not budging over the past few years. Eventually, Etsy will need to raise rates again -- it can only increase the premium on its ads so much, as it has essentially fulfilled the market opportunity of its product.
Airbnb is growing much faster and at only a slight premium
While investing in companies that have satisfied their market demand can be a good strategy, I think the return potential for Airbnb is much higher.
Airbnb is a leader in the short-term rental and experience space. Unlike Etsy, which grew revenue at a 7% pace in the third quarter, Airbnb's revenue rose 18%. Furthermore, Airbnb puts Etsy's profitability to shame. In Q3, Airbnb's operating profit margin was 44%, compared to Etsy's 14%.
Airbnb's market is also growing, while Etsy's GMS is stagnant. Nights and experiences booked rose 14%, and active listings rose 19%. Etsy's growth story is almost wrapped up, and Airbnb's is just starting.
This makes Airbnb's potential much higher than Etsy's. Despite that, Airbnb's stock only trades for a slight premium to Etsy's when assessed from a price-to-free cash flow perspective (a one-time tax benefit currently skews Airbnb's earnings). This makes Airbnb look like a no-brainer buy compared to Etsy.
ETSY Price to Free Cash Flow data by YCharts
Still, Airbnb isn't without its issues. Many worry about municipalities banning short-term rentals or allowing them only under strict rules. Additionally, if a recession occurs, it may harm Airbnb's business.
However, those concerns are overshadowed by Airbnb's strength and execution. With Etsy looking like it has fulfilled its addressable market and is only growing earnings relatively slowly, I'm confident that Airbnb will have a better decade than Etsy.
This is echoed by Wall Street analysts' sentiments for 2024, as Etsy is only expected to grow revenue by 5.4%, compared to Airbnb's 11.6%.
While I had high hopes for Etsy stock, it's time to move on. Airbnb looks like a much better purchase, so I'll be switching some of the proceeds from the sale into Airbnb for 2024 to take advantage of this opportunity.
