When I first heard of the company, to be honest, I’m not particularly excited to look into Etsy stock forecast.
Source: Yahoo Finance / Etsy Inc Stock Price Chart
First of all, the company’s share price has surged more than 200% in 2020. And we all know that’s because the coronavirus pandemic has brought about the acceleration of online retail shopping. And Etsy has definitely benefited from this as well.
Secondly, its current Price-to-Earnings (P/E) ratio is hovering around the 80 level range. Well, P/E ratio is not everything. But it does give me an impression that its valuation may be a bit high at the moment.
And finally, my initial impression of Etsy’s marketplace is a platform catered to more creative and artsy individuals. So, it doesn’t particularly resonate with my engineer’s way of thinking.
But we want to thank to our community member requesting us to take a look at Etsy. We used the opportunity to dig into the company’s business and financials.
On closer look, I realized my initial biases are nothing more than ignorance in the areas of business that the company is operating in.
But whether it calls for an opportunity to invest, that’s what we will try to assess today.
First, let’s take a look at what kicks my interest in Etsy’s business!
Etsy Stock Forecast: Business Overview
Source: Etsy Investor Presentation March 2021 / Value Proposition
Just to be clear, Etsy operates an online marketplace that connects passionate and creative buyers and sellers. This is a fundamental difference compared to other online ecommerce giants like Amazon. Etsy is positioning itself as a destination for unique and creative goods.
As a matter of fact, Etsy surveyed its buyers in 2020. 88% of buyers agreed that Etsy has items that you can’t find anywhere else.
This can be attributed to the vast number of unique items that can be found on the platform. Hence, creative entrepreneurs find as a better platform to list their crafts, than generic mass market ecommerce marketplaces.
Source: Etsy Q4/FY 2020 Financial Results Presentation / FY2020 Financial Results Overview
With that, the company operates in more than 50 different retail categories, generating an impressive growth in Gross Merchandise Sales (GMS) of 106% year-on-year in 2020 to hit a record US$10.3 billion.
Source: Etsy Investor Presentation March 2021 / Growth In Traditional Top Categories
In fact, its top 6 retail categories accounted for 80% of the total GMS in 2020. They are:
- Homewares & Home Furnishings
- Jewelry & Personal Accessories
- Craft Supplies
- Paper & Party Supplies
- Beauty & Personal Care
And these six categories continue to show substantial growth in 2020, recording a 85% increase in GMS year-on-year.
To be clear, these figures exclude the sales of face masks which surged in 2020 due to the coronavirus outbreak.
Meaning that Etsy’s outreach to consumers eyeing for unique crafts and products is increasingly gaining traction, validating its value proposition.
Source: Etsy Investor Presentation March 2021 / Our Marketplaces
As a result, in 2020, Etsy saw a 77% increase in the number of active buyers to 81.9 million. On the other hand, the increased consumer traffic on the platform has in turn attracted more sellers as well. In 2020, the number of active sellers increased by 64% to 4.4 million.
This network effect has become increasingly stronger, with the number of buyers and sellers gaining traction. More creative entrepreneurs will be inclined to take advantage of the increased consumer traffic to gain exposure to their crafts. Similarly, with more sellers bringing their unique goods to the marketplace, it will provide a wider selections of products. Thus, in turn, it will attract more buyers.
Inorganic Growth: Reverb
Source: Etsy Investor Presentation March 2021 / Reverb Acquisition
Apart from expanding its business organically, Etsy is also expanding its footprint inorganically. For instance in 2019, the company acquired Rever. It is a leading global online marketplace dedicated to buying and selling new, used, and vintage musical instruments.
Etsy Stock Forecast: Traction
Now that you have an understanding of Etsy’s business, let’s take a look at some metrics that are worth mentioning. These metrics will show how the gaining traction is building a stronger moat around its marketplaces.
Increasing New, Repeat and Habitual Buyers
Source: Etsy Q4/FY 2020 Financial Results Presentation / 2020 Buyer Segments
First, as mentioned earlier, the number of active buyers increased at an astonishing rate of 77% in 2020 itself. But let’s dive a bit deeper.
Before that, let’s define some key terms that will aid our explanation here:
- New Buyers: Buyers who have not purchase on Etsy’s platforms before
- Reactivated Buyers: Buyers who hadn’t made a purchase in a year or more
- Repeat Buyers: Buyers who made purchases on two or more days in the previous 12 months
- Habitual Buyers: Buyers who have spent $200 or more and made purchases on six or more days in the previous 12 months
Source: Etsy Q4/FY 2020 Financial Results Presentation / Repeat and Habitual Buyers Growth
Understanding these definitions is important. Because, not only did the number of New and Reactivated buyers combined grew 92% year-on-year in 2020. But also that the number of Repeat and Habitual buyers registered phenomenal growth as well at 97% and 157% respectively.
In fact, I would consider the last two segments of buyers growth to be more important. Because it implies a stronger validation of Etsy’s value proposition and stickiness of its platform.
Gross Merchandise Sales per Active Buyer
Source: Etsy Q4/FY 2020 Financial Results Presentation / GMS per Active Buyer
The second metric that’s closely in line with the company’s strong growth in user base and buyer segments is the GMS per Active Buyer.
Take a look of the chart. The GMS per Active Buyer has seen a general upward trend over the past 3 years.
So, again, this positive effect further validates the competitive advantage its platform commands. More buyers are spending more on its marketplace, whether it’s due to higher value products or higher frequency of purchase. This definitely shows that the platform is creating significant value for its customers.
Source: Etsy Q4/FY 2020 Financial Results Presentation / Search and Query Reformulation
Thirdly, perhaps a more business-related metric, will be its search and query reformulation performance.
Observe from the chart. The percentage of purchases on the first page of search results has improved from 77% to 86% over the past few years.
Similarly, the percentage of purchase visits with a query reformulation has decreased from 39% in the beginning of 2018 to 31% by the end of 2020.
These figures show the enhancement in Etsy’s technology. And that it has helped its customers find what they are looking for more accurately and quickly.
Definitely a win for its marketplace business in the long run.
Non-Mask GMS Growth
Source: Etsy Q4/FY 2020 Financial Results Presentation / Non-Mask GMS Growth
Finally, we take a look at Etsy’s non-mask GMS growth in 2020.
Here we see that even if the sales of masks is excluded, the quarterly GMS are still showing significant growth of more than 90% compared to the respective quarters in the previous year.
In fact, the percentage make-up on the sales of masks had been contracting from 14% in Q2 to only 4% in Q4 2020.
As a bonus, 50% of mask-only buyers in Q3 actually returned to Etsy in Q4 for a non-mask purchase.
Well, this is not so much of a long-term business metric to focus on. But rather a validation that the company’s booming business in 2020 is not brought about by unstainable short-term external factors.
This gives me the confidence that Etsy’s business is fundamentally strong. Hence, it make a case for us to dive deeper to investigate if there is any investment opportunity.
Etsy Stock Forecast: Growth And Valuation
Source: Etsy Q4/FY 2020 Financial Results Presentation / Marketplace vs Services Revenue Q4 2020
Well, Etsy segregates its revenue stream namely into two segments – Marketplace and Services revenues. Marketplace makes up about 77% of the company’s revenue, while its Services segment makes up the remaining 23%
Take a look at the diagram. Marketplace revenue streams are made up of listing fee, transaction fee, payments platform and external Ads related fees. They are pretty typical of a marketplace business.
Similarly, its Services revenue streams are made up of value-added services such as advertising and shipping labels.
All these are pretty much what we can expect of a business operating a marketplace. I don’t see how we can look at these two segments separately to understand the valuation of its business.
So, I believe that examining the growth in GMS will still be key to understanding the prospects of Etsy.
Overall Ecommerce Growth Forecast
Source: Statista / Ecommerce Market Growth Forecast
Well, the global ecommerce market is expected to grow at a compounded annual growth rate (CAGR) of 6.29% from 2021 to 2025.
Yes, this may not be representative of Etsy’s potential for growth in the coming years. But I’m highlighting here to serve as a baseline reference. Because I don’t see any credible research focusing on the “special” products ecommerce that Etsy is in.
Etsy Historical Growth
Source: Stockrow / Etsy Inc Revenues Snapshot
So, let’s turn to the historical growth of the company to get a better gauge of its growth rate.
Excluding the extraordinary year in 2020, the company registered year-on-year revenue growth in the 20% – 37% range over the past 5 years.
To be conservative, let’s take 20% as the potential growth rate for Etsy in the coming years.
Etsy Stock Forecast: Earnings
Source: Nasdaq / Etsy Inc, Yearly Earnings Forecast
In fact, this 20% is roughly in line with analysts’ forecasted earnings growth rate of about 19% annually. This will imply an earnings per share (EPS) growth from US$2.69 in 2020 to a projected EPS of US$5.38 in 2024.
So, let’s use US$5.38 as the projected EPS for Etsy.
Assume that its P/E ratio equilibrates to a more reasonable value of say 30. This will translate to a target price of around US$161 in 2024.
Etsy Stock Forecast: Valuation
Source: Yahoo Finance / Etsy Inc Stock Summary
Therefore, given Etsy’s current share price of around US$215, it’s too high for us to consider getting in now.
Point To Note: Total Addressable Market
Source: Etsy Investor Presentation March 2021 / 2018 Total Retail and Online TAM
However, by growing at an annual rate of 19% from now till 2024, Etsy will have only conquered about 20% of the Market for “Special” products. This “Special” product market is estimated to be worth about US$100 billion. Not to mention if we follow the company’s defined retail and online Total Addressable Market (TAM) in its 6 core geographies and across all relevant retail categories worth US$1.7 trillion.
So, perhaps the company will trade at a multiple of more than 30 in the years to come. Especially if indeed there’s signs showing that the company’s growth engine is not slowing down.
Then again, whether Etsy can compete successfully in its stated TAM is still too early for us to say.
Let’s wrap up this Etsy stock forecast review. We are not saying that the company’s share price will come down. Or that it’s not worth investing in the company at the moment.
As discussed earlier, the company does show some strong performance and durability in its business. This is shown from the increasing Repeat and Habitual Buyers, as well as the rising GMS per Active Buyer, recorded over the past few years.
And this is what I like about the business. In fact, I think there is great potential for Etsy as the market becomes more fragmented and consumers have more choices. With the aid of the ever-improving technology, there will be an increasing need for personalized products and services. So, I think the company is well positioned to take advantage of that behavioral and technological change.
But at this point in time, there is not enough margin of safety for us to jump in. Definitely adding Etsy stock to my watchlist. Perhaps when new and more information surfaces, we can monitor and reassess the value of the company again.
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