By Jacob Mermelstein
Background:
Etsy is a global e-commerce platform with a niche for handmade creative goods. Sellers on the platform are entrepreneurs. Buyers come to the website because of the unique products. Its platform offers a wide range of products and retail categories supplied by entrepreneurs internationally.
Market and competitive advantage:
Etsy has positioned itself to take advantage of a total market worth $1.7 trillion. It currently occupies 5% of the ‘special items’ market which has an estimated worth of $100 billion. However, there is fierce competition in e-commerce. Etsy distinguishes itself from competition in four ways. First, they have built an algorithm for its website which offers customers superior search, discovery and recommendations of products. Etsy has built a trusted brand name and continues to build trust with their new initiatives each quarter. Most recently, they offer free shipping for products bought in bundles. Etsy’s unique items are by far the most distinguishable factor from its competitors. A 2019 survey of its buyers revealed 88% of its products were not available on other platforms. Lastly, it has set a tone of human connection through empowering its sellers to post videos on their inspiration for their products.
Acquisitions:
Etsy is an effective capital allocator. It has performed three acquisitions within the past four years. Not all managements are created equal. Those that possess the skill of effectively deploying capital reap huge reward for shareholders. In 2016, Etsy acquired a private company named Blackbird. The acquisition improved Etsy’s technological capabilities and employee talent. Blackbird’s capabilities drastically improved the functionality of Etsy’s website. Improvements were made in machine learning that analyzes user behavior, natural language processing, deep learning-based image recognition and spelling correction and predictive typeahead. In 2018, Etsy’s management decided to expand internationally and acquired DaWanda. The deal was at no cost to Etsy as Dawanda was struggling to survive and accepted an offer from Etsy to transfer over their customers and sellers to its platform since it would close shop either way. A magnificent win to Etsy, this increased their geographical exposure, total addressable market and customer base without costing a dime. DaWanda was a lower tier but direct competitor with Etsy in the marketplace for homemade items. Its customer bases were in Germany, Poland, Austria, and Switzerland. In 2019, Etsy vertically expanded its category offerings by acquiring Reverb, the reseller of musical instruments. This acquisition was not integrated directly into Etsy’s platform but remained a subsidiary. Since acquisition, Reverb has been a positive contribution to Etsy’s revenue and growth.
Financials:
Healthy and growing financials are imperative to the success of a public company in the market. Etsy has accomplished outstanding revenue growth averaging above 30% for the past five quarters. Most importantly, it has been cash flow positive during that time. This has allowed it to amass over one billion in cash. As the saying goes, “cash is king.” Most importantly, a management with cash can further improve a company’s balance sheet. After this past quarter’s earnings call, Management disclosed it would raise a zero interest convertible note worth $650 million, due in 2027, to pay off a different convertible loan, due in 2023 and reestablish its share repurchasing program with excess cash. These moves are positive for shareholders and illustrates management’s priority to maximize shareholder profits. Also, the platform recorded $2.7 billion in GMV (Gross Merchandise Value) which is the total merchandise sold on the platform’s customer to customer exchange site. In comparison to last year, that number grew 147%. The transactions on the platform have dramatically increased and illustrate the benefits Etsy received from the transition of brick and mortar retail to online shops.
Management:
A management team that is highly experienced and has integrity towards shareholders is of endless value. Financial history is filled with incidents of corrupt management and fraud. The result in most cases is shareholders lose their investment. Etsy’s track record has shown to be beneficial to shareholders. Its management has chosen to reinvest its earnings in both share repurchases and carefully chosen acquisitions. Above all, the company has been chosen to join the S&P 500 before many other candidates like Tesla. The notable achievement will likely propel the company and create a further challenge in remaining in the exclusive club.
The experience of Etsy management is rooted deep within all positions of its executives. CEO Josh Silverman “served as President of Consumer Products and Services at American Express, CEO of Skype, and CEO of shopping.com, and held various executive roles at eBay.” CFO Rachel Glaser “[b]rings more than 30 years of senior financial experience to Etsy.” “She was previously employed at Leaf Group, where she served as CFO since 2015.” “As the CFO at Move, Inc. she helped lead a successful sale of the company to News Corporation.” CTO Mike Fisher “[p]rior to joining Etsy, was the co-founder and managing partner of the consulting firm AKF Partners.” “Mike’s career in technology has also included the roles of Chief, Technology Officer of Quigo, Vice President of Engineering & Architecture for PayPal, and various roles at General Electric.” The remainder of its management have long tenures at other companies and held leadership positions.
The acceleration of ecommerce:
McKinney recently released a study on the acceleration of ecommerce in the U.S.. They concluded that ten years of growth had taken place within the months after COVID-19. The acceleration is attributable to businesses adapting their sales and operations to reflect demand from online purchasers wanting a contactless way to shop. The full report on the impact of ecommerce on the retail industry is linked here.
The current environment of economic uncertainty has been overall beneficial for Etsy. COVID-19 has accelerated U.S. ecommerce penetration in the market. Retail store closures, shifts in offline to online spending, government stimulus, and demand for PPE equipment continue to benefit online marketplaces. On the flip side, unemployment, competitive dynamics, consumer confidence and economic uncertainty will be headwinds for the industry as a whole for the foreseeable future.
Conclusion:
Etsy has been able to prosper through one of the most challenging years in market history. Its industry has more room for growth and its management is likely to take advantage of that both in the U.S. and internationally. Next quarter, it expects another outstanding quarter. I would keep an eye on this company’s growth and development.
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Sources:
https://investors.etsy.com/home/default.aspx
https://investors.etsy.com/press-releases/press-release-details/2020/Etsy-Announces-Pricing-of-650-Million-of-Convertible-Senior-Notes-Offering/default.aspx