Etsy Inc. (ETSY, Financial) is an e-commerce company that specializes in niche and vintage products. In a “sea of sameness,” the company offers something unique and different, while also inspiring the creativity of it sellers. Therefore, it is no surprise the business has built a community around its products and its brand continues to grow.
Business model
Etsy has created a two-sided e-commerce marketplace that connects independent sellers with buyers. But unlike Amazon (AMZN, Financial), Etsy focused on curated, handmade and unique products that a customer will not find anywhere else. This draws a certain type of consumer to Etsy, who is tired of seeing the same generic products.
The business then uses its “Personalization Engine” to match specific products to a buyer based on past preferences. In 2023, the business introduced its XWalk feature, which enables more ads to be shown to users without impacting conversion rate.
During the most recent quarter, Etsy doubled the size of its library, which is a curated section of content based on visual appeal, uniqueness and craftsmanship. The business is now using machine learning models in order to better predict the quality of the items users search for. It also recently launched its “Make an Offer” program, which focuses on U.S. vintage sellers.
In terms of its brands, Etsy has made a number of acquisitions over the years, such as U.K.-based Depop, an application for buying and selling vintage clothes. This segment reported a solid 25% increase in gross merchandise sales year over year.
Etsy has decided to sell its Brazilian handmade goods marketplace Elo7 to Enjoei, a Brazil-based business. I believe this is a positive sign as the company tends to keep the acquired marketplace as standalone products and its lack of local knowledge in Brazil means headwinds can be difficult to remedy.
Growing financials
Etsy reported mixed financial results for the second quarter. Its revenue of $628.9 million beat analyst forecasts by $11.49 million, but only rose by 7% year over year. This was driven by gross merchandise sales, which, at $3 billion, was flat year over year. A positive was its quarterly active buyers reached an all-time high of 91 million.
The company's marketplace reported GMS of $2.6 billion, down 0.7% year over year despite positive order growth and international market growth.
The macroeconomic environment added tailwinds to this as consumers' wallet share shifted away from discretionary spending.
By geography, 47% of Etsy’s GMS came from where the buyer or seller was outside of the U.S. This is a positive sign for diversification. In the U.K., a modest decline in GMS was reported, but in Germany and France, growth was reported.
Custom lifetime value rose by an incredible 50% year over year, which was driven by higher GMS per active, transaction fee increases and growth in Etsy ads.
Etsy uses a classic customer acquisition cost-to-LTV ratio in order to help track its marketing spend efficiency. In this case, the ratio has remained steady, while its performance marketing return on investment has risen by 40% since 2019. This was driven by an expansion into new channels and new countries. The company has also spent an increasing amount on retaining and reactivating buyers to drive increased purchase frequency.
Its LTV model estimates a 30-day payback period after acquisition, but then still benefits from future frequent purchases.
Etsy has also ramped up its investments into brand as it continues to focus on becoming a household name. In the short term, brand marketing can seem like a softer lower conversion marketing style. But long term, this can drive huge organic growth in an extremely cost-effective way.
Margins and balance sheet
Moving on to margins, Etsy reported a 70% gross margin in the second quarter, which was steady relative to the prior year. Its adjusted Ebitda was $166 million at a solid 26.4% margin. Adjusted Ebitda has increased by a 3% compounded annual growth rate since 2019.
Earnings per share came in at 45 cents, beating analyst forecasts by 2 cents.
The company reported a 19% increase in product development expenses to $122 million. I do not believe this is necessarily a bad thing as Etsy continues to innovate to stay ahead.
Consolidated marketing spend rose by 1% year over year to $166 million, driven by the aforementioned trends.
Marketing spend has continued to drive greater efficiency as its spend as a percentage of revenue dipped by 160 basis points year over year to 26%.
Valuation
Etsy trades with a price-sales ratio of 3.12, which is lower than its five-year average.
Based on historical ratios, past performance and future earnings projections, the GF Value Line indicates a fair value of $185 per share and thus, the stock is classed as undervalued at the time of writing. The calculator does warn of a possible value trap, but I believe this is unjustified.
Final thoughts
Etsy is an intriguing business that has found its niche in the e-commerce market. In a sea of “sameness” dominated by giants such as Amazon, the company has continued to thrive. Given the marcoeconomic headwinds, Etsy is still producing solid results despite slower growth than previously. Therefore, this stock could be a great long-term investment for those who believe in the future of online curated stores.
