Shares of vintage products retail platform Etsy Inc. (ETSY) have tripled price over the last 12 months and are up 172% since February 2018 following a string of impressive quarterly results. The company operates an e-commerce platform that lets users buy and sell handmade items and supplies.
Etsy has also added some unique factory-manufactured items to its portfolio over the last few years as it seeks to expand its addressable market. However, it is still much considered to be the eBay Inc. (EBAY) of vintage products and that is how it distinguishes itself from a growing list of e-commerce platforms that includes Shopify Inc (SHOP), Square Inc. (SQ) 21vianet Group Inc. (VNET), Match Group Inc. (MTCH) and HealthStream Inc. (HSTM), among others. All these seek to disrupt targeted unique markets.
Etsy was established in 2005, and despite experiencing a series of challenges that included an IPO and investor lawsuit in 2010 and 2015 respectively, Etsy has grown to connect nearly two million creative entrepreneurs with over 33.4 million customers worldwide according to the company’s 2017 annual report.
In the online marketplace it has become imperative that for a business to be successful and perhaps fend off competition from bigger brands like Amazon Inc. (AMZN) and eBay, smaller companies must provide unique products that distinguish them from the rest. This trend can be seen across several segments of e-commerce-based retailers and other online businesses, including coupon codes vendors like CouponBuffer.com, which specializes in software coupons, promo codes, discounts, and deals. This shows why Etsy continues to identify itself as a vintage products marketplace above everything else, even as its product line continues to widen.
So, what’s really driving Etsy’s Performance?
Part of Etsy’s recent price rally can be attributed to the company’s recent quarterly earnings which have outperformed analyst estimates from one quarter to the next. However, the main driving force behind the company’s rapidly growing market value is its recent changes in the revenue model, which included a change in subscription packages and transaction costs on every product sold.
Etsy announced that it was introducing new subscription packages with the launch Etsy Plus in July, which meant that sellers will now pay a monthly subscription fee of $10.00 to the end of the year. The subscribers will then pay $20.00 per month in 2019 when more features are added to the new package, dubbed Etsy Premium.
However, while investors will be delighted with the new subscription packages and fees, some Etsy sellers have raised concerns, which could prove to be a major hurdle for the company’s long-term growth prospects. Some have questioned the company’s decision to increase transaction fees to 5% from 3.5%.
While this might appear to be a small fee to pay under general circumstances, the most worrying part according to some sellers is that the 5% fee now includes shipping fee, which was not the case before. As such, some sellers have suggested they might have to pass the extra charge to the customer should the additional fees prove too much for their businesses.
On a more positive note though, sellers will be delighted by the additional features and services that come with the increased fees and the new packages. According to Etsy, the company will use the new revenue model to improve user experience by offering advanced profile customization options for entrepreneurs, as well as, better customer support.
One of the biggest challenges that online businesses face today is the ability to provide dedicated customer support. It is one of the strongest selling points for successful online businesses and with Etsy dedicating a huge chunk of its revenues towards revamping customer support, the pros of the increased fees and the new subscriptions packages could yet outweigh the cons.
The company is also expanding to central Europe and given the recent updates on user data protection for online businesses that target EU-based users, Etsy’s reinvestment in its online platform could yield more benefits and help it adapt quickly to the demands of the new markets that it ventures into in the next few quarters. The net impact will be an improvement in the company’s top line, whose benefits could trickle down to boost the EPS thereby resulting in a better return on shareholders’ equity.
The company’s top line is expected to maintain a steady growth over the next three years, but EPS could slow down slightly in 2018 as the reinvestment phase continues. However, a recovery in earnings will be expected in 2019 and 2020 when the new markets break-even and begin to generate earnings for the income mix.
In summary, Etsy’s new revenue model looks appealing to investors as it provides stability in terms of revenue and earnings projections. The company raised its guidance on revenues after announcing the new packages in June and this appears to have sparked a massive rally in the stock after the share price climbed 34% within a week’s time.
Some analysts and investors had written off the chances of the company’s stock further advancing but it is now up 44% since June. Whether or not there is still room to run remains to be seen, which is why investors would be digging deeper to find out if it is already too late to buy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.