2023-08-21 16:59:57 ET
Summary
- Etsy experienced significant revenue growth during the pandemic as online shopping and interest in crafting surged.
- The company's financial health is mixed, with a high valuation, long-term debt, and a deficit in net income.
- Challenges lie ahead for Etsy, including declining metrics, competition from larger players, and the need for sustainable growth.
Founded in 2005, Etsy has become synonymous with the online trading of unique and handcrafted goods. It made a significant name for itself in the digital marketplace sector by connecting both passionate buyers and sellers. Yet, recent times have presented a mixed bag for the company, with unique challenges and opportunities cropping up.
The Pandemic's Silver Lining
While many businesses grappled with unforeseen challenges during the pandemic, Etsy stock witnessed a remarkable upswing. With people confined to their homes, online shopping thrived, and a renewed interest in crafting emerged. The digital platform became the go-to place for many looking to monetize their creative ventures.
The numbers speak for themselves. Revenue growth rates over the past years illustrate the platform's increase in popularity:
- 2016: 34%
- 2017: 21%
- 2018: 37%
- 2019: 36%
- 2020: 111% (a direct pandemic-induced spike)
- 2021: 35%
- 2022: 10%
As the world returns to normal, Etsy's revenue growth has begun to taper. The impressive spike in 2020 casts a looming shadow over subsequent years' figures. With so much demand pulled forward by the pandemic, it remains to be seen how Etsy can sustain its prior growth trajectory.
Diving Deeper: Financials and Valuation
As of now, Etsy's valuation stands at $9.4 billion, boasting $1.2 billion of cash on hand. However, it's also saddled with long-term debt of $2.3 billion, bringing the enterprise value to $10.5 billion.
In terms of financial health, the company has reported:
- Revenue over the last 12 months of $2.7 billion
- Adjusted EBITDA of $731 million
- Free Cash Flow of $660 million
Net income, however, shows a deficit of $717 million, significantly impacted by stock-based compensation and an uptick in product development expenses.
On valuation metrics, Etsy is currently:
- 3.4 times its TTM revenue
- 14 times its TTM EBITDA
- 16 times its TTM free cash flow
And it's business model is relatively simple, gaining 74% of its revenue from marketplace activities (transaction, listing, and payment processing fees) and 26% from optional seller services like on-site advertising and shipping labels.
While the stock isn't expensive, it isn't yet in bargain territory. And so any investment needs to consider what level of growth and profitability is already priced in.
Challenges Ahead
While the past year saw a 7.5% increase in revenue, other metrics haven't been as promising. Gross merchandise sales fell 0.6% YoY, adjusted EBITDA dipped by 1%, and EBITDA margins slid from 28.3% to 26.4%. This decrease in margins is even more surprising given Etsy's move to raise seller fees.
The number of habitual buyers, which serves as a core gauge of customer loyalty and platform stickiness, declined from 8 million in 2022 to 7.1 million. This decrease is a red flag, suggesting the platform might be losing its charm among some of its most dedicated users.
Bulls may point to a slowing of revenue growth declines and an increase in total active buyers which hit a record of 91 million. But whatever way you look at it, the current figures simply don't add up to stunning growth:
Valuation and Peer Comparison
So what's priced in? If you assume a scenario where Etsy is able to sustain a 10% annual growth rate over the next decade, with a net income margin of 18%, that would bring its revenue to around $7 billion in 10 years' time with a net income around $1.3 billion. At a 20 times multiple, the valuation would then be $26 billion, translating to an investment return of approximately 10.7% per annum.
This might sound like a reasonable return but given current performance and peer comparisons, this may be an optimistic outlook. eBay ( EBAY ), for example, operates at a 14% net income margin while holding a PE of 18. Optimism about Etsy's future growth prospects might need tempering. The fact is that Etsy operates in a reasonably small but highly competitive niche. Competitors like Amazon (AMZN) and Shopify (SHOP) are always going to offer reasonable alternatives to a marketplace like Etsy.
Attempts to enlarge its niche may be able to boost growth but doing so also brings with it risk. Similarly, Etsy might boost revenue by raising seller fees again but this tactic alone will not solve the overarching issue of sustainable growth in my view.
Concluding Thoughts
Etsy has undeniably built up a solid place for itself in the e-commerce sector among niche and handcrafted goods. Its past growth is commendable, but its trajectory ahead remains uncertain.
Factors like diminishing habitual buyers, challenges in increasing net income margins, and the looming specter of bigger players like Amazon and Shopify make the platform's future a mixed bag. While Etsy stock is not particularly expensive, it's also not an absolute steal, making it a cautious watch for investors.
For further details see:
Etsy: Navigating Post-Pandemic Waters