Etsy Stock: Is Its Valuation Fair - What To Consider
Summary
- Etsy's share price has corrected by -15% from the peak with expectations of normalized e-commerce demand in 2021, but the company has emerged as a stronger e-commerce player after 2020.
- Etsy trades at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 62.1 times and 47.9 times, respectively, which is on par with Amazon.
- I have a Bullish rating for Etsy, because it has a sustainable competitive advantage in the form of captive customers, and its 2020 GMS is small compared to its TAM.
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Elevator Pitch
I assign a Bullish rating to Etsy, Inc (NASDAQ:ETSY).
Etsy's share price has corrected by -15% from the peak with expectations of normalized e-commerce demand in 2021, but the company has emerged as a stronger e-commerce player after 2020 with Etsy.com being the fourth largest e-commerce website in the US last year. Etsy trades at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 62.1 times and 47.9 times, respectively, which is on par with Amazon (AMZN). This is justified considering Etsy's unique positioning (vis-a-vis Amazon) and the company's long growth runway.
I have a Bullish rating for Etsy, because it has a sustainable competitive advantage in the form of captive customers driven by habit, and its 2020 GMS (Gross Merchandise Sales) is small compared to its TAM (Total Addressable Market) implying a long growth runway. While share price volatility for Etsy in the near-term is unavoidable with the market favoring "reopening plays" in 2021, ETSY's earnings and share price are likely to be higher in the coming years.
Company Description
Etsy, Inc refers to itself as a company that "operates two-sided online marketplaces that connect millions of passionate and creative buyers and sellers" with its "primary marketplace, Etsy.com" being "the global destination for unique and creative goods", as per the company's media releases.
ETSY generated 67%, 11%, and 22% of its FY 2020 revenue from the US, the UK and other international markets, respectively. The company lists "the United States, United Kingdom, Germany, Canada, Australia, France, and India" as its "seven core geographic markets" in its FY 2020 10-K.
Approximately 42%, 21% and 16% of Etsy.com's Gross Merchandise Sales or GMS in FY 2020 were derived from the homewares & home furnishings, jewelry & personal accessories and craft supplies product categories. Other key product categories for the Etsy marketplace include beauty & personal care, apparel, and paper & party supplies. ETSY defines GMS as "the dollar value of items sold in our marketplaces within the applicable period, excluding shipping fees and net of refunds associated with canceled transactions."
Etsy Stock Price
Etsy's stock price performance was excellent for both the 2020 and 2021 year-to-date time periods. The company's share price rose by +302% from $44.30 as of December 31, 2019 to $177.91 as of December 31, 2020. Year-to-date in 2021, Etsy, Inc's share price has increased by +17% to close at $208.20 as of April 1, 2021. Nevertheless, ETSY's current share price is -15% off its year-to-date and all-time share price peak of $244.58 registered on March 1, 2021.
It is impossible to discuss Etsy's stock price without considering the coronavirus pandemic, Work-From-Home tailwinds, and the company's record-breaking financial performance last year.
ETSY reported its FY 2020 financial results on February 25, 2021, and both its top line and bottom line exceeded market expectations. Etsy's revenue grew by +111% from $818.4 million in FY 2019 to $1,725.6 million in FY 2020, and its GMS increased by +107% from $4,975.0 million to $10,281.1 million over the same period. Etsy's GAAP net profit jumped by +264% YoY from $95.9 million in FY 2019 to $349.2 million in FY 2020.
At its FY 2020 results briefing on February 25, 2021, Etsy noted that "2020 was an extraordinary year for e-commerce overall as the growth rate of e-commerce roughly doubled as much of the offline world shut down." The company also added that "Etsy grew almost 2.5 times (in terms of GMS) as fast as e-commerce (industry benchmark)" and Etsy.com had become "the fourth largest retail e-commerce site by monthly visits" in the US last year.
Etsy's non-GAAP adjusted EBITDA expanded by +195% YoY to $549.1 million in FY 2020. Although Etsy, Inc did not provide its own non-GAAP adjusted net profit figure, sell-side analysts estimated that Etsy's non-GAAP adjusted net income grew by +206% YoY to $435.5 million based on S&P Capital IQ data.
Comparison Of Etsy's GAAP Net Profit With Non-GAAP Adjusted EBITDA
Source: Etsy's FY 2020 Results Presentation Slides
Moving forward, Etsy has provided guidance for 1Q 2021, which implies a +125%-135% YoY revenue growth and a +115%-125% YoY GMS increase in the first quarter of this year. However, the outlook for Etsy's full-year financial performance is not as good. Market consensus sees ETSY's full-year revenue and GAAP net profit increasing by +25% YoY and +24% YoY to $2,164.0 million and $432.2 million, respectively for FY 2021.
In terms of non-GAAP numbers sourced from S&P Capital IQ, sell-side analysts forecast that Etsy's non-GAAP adjusted net income will only increase by +6% from $435.5 million in FY 2020 to $461.1 million in FY 2021. This explains why Etsy's share price has corrected by -15% from its year-to-date 2021 peak of $244.58 recorded on March 1, 2021.
The weaker growth forecasts for FY 2021 and Etsy's share price correction since the beginning of March this year suggest that investors are concerned that e-commerce demand will normalize rapidly this year as COVID-19 is gradually contained with the roll-out of the vaccine in the US and other countries.
Etsy acknowledged at the 2021 Truist Securities Technology, Internet & Services Conference on March 10, 2021 that "people have a lot of pent-up demand for things like travel and dining out a theater" and "they haven't been able to go out into physical retail for quite some time or as much as they would have liked to." But Etsy, Inc also highlighted that "we believe that we've made sort of a permanent inflection point in the awareness of Etsy" being "a top 5 (e-commerce) site now in the US and in the UK as well", with "people are not only aware that Etsy exists, but the range of things that Etsy can provide."
It is noteworthy that ETSY shared at the recent FY 2020 earnings call in late-February 2021 that "of the 3 million mask-only buyers in Q3 (2021), approximately 50% returned in Q4 for a non-mask purchase" which the company sees as an indicator that Etsy is "retaining and converting buyers who are coming to Etsy for some of their essential purchases." Etsy, Inc also disclosed in its FY 2020 results presentation that the number of new buyers on the Etsy marketplace doubled from 19 million in FY 2019 to 38 million in FY 2020, while the number of habitual buyers increased by +157% YoY to 6.5 million last year. The company defines habitual buyers as "Etsy buyers who have purchased $200 or more on Etsy and have made purchases on six or more purchase days in the last 12 months."
While the FY 2021 revenue and earnings growth for Etsy is unlikely to be as good as it was in FY 2020, it is important to note that Etsy has emerged as a stronger e-commerce player after last year (i.e. Etsy.com became fourth largest e-commerce site in the US), and it is well-positioned to capitalize on secular e-commerce tailwinds in the medium to long term.
Is Etsy Stock Overvalued
The market values Etsy at consensus forward FY 2021 and FY 2022 normalized P/E multiples of 62.1 times and 47.9 times, respectively based on the company's share price of $208.20 as of April 1, 2021. As a comparison, the stock's three-year mean consensus forward next twelve months' normalized P/E multiple was 57.3 times.
Sell-side analysts expect Etsy, Inc to increase its normalized earnings by +6% YoY and +32% YoY, respectively in FY 2021; and they see the company delivering ROEs of 40% and 31% for this year and next year, respectively.
Etsy's forward P/E valuations are on par with that of Amazon. Etsy's forward ROEs are higher than that for Amazon, but its normalized earnings growth in the next two years are slower as compared to Amazon.
Etsy's Peer Valuation Comparison
| Stock | Consensus Current Year Normalized P/E Multiple | Consensus Forward One-Year Normalized P/E Multiple | Consensus Current Year Normalized Earnings Growth | Consensus Forward One-Year Normalized Earnings Growth | Consensus Current Year ROE | Consensus Forward One-Year ROE |
| Amazon.com, Inc. | 66.5 | 47.9 | +16% | +42% | 25% | 24% |
| eBay Inc. (EBAY) | 15.4 | 13.7 | +14% | +11% | 56% | 47% |
| Walmart Inc. (WMT) | 24.9 | 23.1 | -3% | +7% | 17% | 18% |
Source: Author
The financial data used in this article are sourced from S&P Capital IQ.
At the Canaccord Genuity eCommerce Sustainable Advantage Forum held on March 24, 2021, Etsy highlighted the key difference between the company and Amazon. ETSY stressed that it is not "playing Amazon's game" like everyone else, which is "trying to sell the same products that are available on Amazon" and "ship it faster or sell it cheaper." The company added that our brand just stands for something really fundamentally different" as compared to Amazon and "other mass e-tailers", and "if Etsy can be one of the primary places you go when you don't want to buy it on Amazon, I think that opportunity is absolutely enormous."
ETSY also mentioned at Loop Capital's 2021 Consumer, Industrial, & TMT Investor Conference that "eBay comes close" as a competitor, but they "don't focus on sort of the uniqueness and the specialness of an individual seller as a creator" like Etsy.
I don't think Etsy is currently overvalued, if one focuses on Etsy's differentiated positioning via-a-vis its rivals, and its long growth runway (detailed in the next section).
Is Etsy Stock A Buy, Sell, Or Hold
I think Etsy stock is a BUY. ETSY has a sustainable competitive advantage, and it has growth drivers in the form of cross-category purchases and increased contribution from international markets. Also, Etsy's total addressable market or TAM is huge.
In the book "Competition Demystified: A Radically Simplified Approach to Business Strategy" authored by Bruce Greenwald and Judd Kahn, it is highlighted that "customer captivity that is based on habit" is a key sustainable competitive advantage or moat, where "habit leads to customer captivity when frequent purchases of the same brand establish an allegiance that is as difficult to understand as it is to undermine."
As mentioned earlier, the number of habitual buyers on the Etsy marketplace grew by +157% to 6.5 million in FY 2020. At Loop Capital's 2021 Consumer, Industrial, & TMT Investor Conference on March 12, 2021, Etsy revealed that "the conversion of a repeat buyer (shoppers who made purchases on two or more days in the previous 12 months as per company's 10-K) to a habitual buyer is accelerating" with "11% of repeat buyers in Q3 became habitual buyers in Q4, up from 7% conversion in the prior quarter."
Notably, Etsy also continues to widen its "customer habit moat." The company emphasized at its recent FY 2020 results briefing that "all parts of the funnel are playing a role in getting people to come back more often and become habitual buyers, and we're learning more about how they all work in conjunction." As an example, the company shared that "we are starting to get much more nuanced about, particularly in performance marketing, how to bid differently for different customers that might have a different lifetime value."
With respect to future growth drivers, cross-category purchases are one of the key things to watch out for. Etsy disclosed at the company's FY 2020 earnings call that 17% of "buyers came for purchases across two or more categories" in FY 2020, which the company believes it indicates that consumers "are really exploring Etsy and understand the breadth of product that we have."
Also, there is still significant room for growth, when it comes to assessing Etsy's future growth runway. As highlighted in the "Company Description" section of this article, Etsy's sales are still concentrated in a number of key product categories, and it generated two-thirds of its FY 2020 revenue from the US with overseas revenue derived from a handful of foreign markets. This brings us to the point about Etsy's total addressable market or TAM.
At the 2021 Truist Securities Technology, Internet & Services Conference on March 10, 2021, ETSY noted that "there is tremendous room for growth in each one of those (key product categories contributing majority of sales), along with the tail of the other 50 categories (other product categories that are part of the 'long tail'), and it also highlighted that its UK business has gone "from top 20 to top 10" and then "to top 5" last year. Etsy's GMS was $10.3 billion in FY 2020. In comparison, the company estimated that its TAM for its "6 core geographies across all relevant retail categories" was $1.7 trillion in 2018 according to its investor presentation slides.
Etsy's key risk factors include a slower-than-expected pace of revenue and earnings growth in FY 2021 with a greater degree of e-commerce sales normalization than anticipated, and any future actions that alienate its buyers or sellers.
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Comments (11)
Job vacancies are going to be disappearing rapidly during the course of this decade, as technology takes over one job after another, at an ever increasing pace. By the end of this decade, most of the World's companies will need a tiny fraction of the workforce that they employ today. For those who want to work and make an extra few bucks, companies like ETSY will provide an excellent vehicle.