Who would have thought one of the stickiest pandemic winners wouldn’t be at-home exercise or streaming, but…crafting?
The e-commerce company Etsy isn’t “cool”—its namesake marketplace is far from sexy, and its recommendation algorithms still need a lot of work. In some ways Etsy owns this, describing its story as “wonderfully weird.” And yet, after a pandemic boom that catapulted into prominence what was once considered a kitschy, fringe site for creative types, Etsy remains wildly popular. Ironically, its weirdness might be what has made the platform resilient when e-commerce is not only crowded but also suddenly out of favor.
Like most tech stocks this year, Etsy’s shares have taken a hit. Unlike peers, they may have bottomed, climbing nearly 40% over the past three months, besting even the e-commerce king, Amazon.com. Etsy is down just 45% this year, while Shopify, for instance, has lost about 70% of its value over that period.
Unlike Shopify, Etsy delivered a second quarter that was in line with expectations including better-than-expected profit margins. Etsy benefited from an April increase to 6.5% from 5% in the transaction fees it charges sellers on its marketplace platform. It says something about Etsy’s value that sellers are willing to pay more, even while the world has opened up and they are free to sell offline again. Last month Etsy said it hasn’t seen any noticeable change in its seller base as a result of the fee change.
After a breakout year in 2020 that saw gross merchandise sales more than double, Etsy followed with another standout year in 2021, expanding those sales by 31%. That turned out to be “not your average pandemic bump,” as AB Bernstein analyst Nikhil Devnani put it, noting last month that the company “continues to prove, one quarter at a time, that it has real staying power.” Wall Street is modeling that its gross merchandise sales will fall less than 2% this year, despite a worsening macroeconomic backdrop.
Buyers flooded Etsy’s marketplace in 2020 to buy homemade, stylish face masks. Many have since quit the masks, but most have stuck with Etsy. Face masks were 7.2% of gross merchandise sales for the company in 2020. By the end of last year, they were so inconsequential that the company didn’t even bother to call them out. Meanwhile, Etsy’s active buyers more than doubled in the second quarter versus the same period three years earlier, FactSet data show.
Newer buyers seem especially valuable, with those acquired in 2020 spending more on Etsy.com’s marketplace over time than those acquired in 2017. YipitData indicates that order frequency has been increasing since before the pandemic. And, encouragingly, habitual buyers, or those who have spent $200 or more and made purchases on six or more days in the previous 12 months, accounted for nearly half of its overall gross merchandise sales in the second quarter, Etsy said.
For shoppers, Etsy offers something different “against a sea of sameness,” in the words of Chief Executive Josh Silverman last month. Looking for something handmade by another mom for your baby’s room or a bridesmaid dress no one else could possibly have? Etsy might just be your best or only bet. In an Etsy survey last year, 87% of buyers said the platform has things they can’t find anywhere else, while 72% said there is no other store or website similar to Etsy.
Etsy is no longer a growth stock, but in the current economy, winners seem to be those platforms dreaming less about their future business and doing more to manage the business they currently have. Credit here to Mr. Silverman’s management: While Shopify recently laid off about 10% of its workforce after a pandemic hiring spree, Etsy said last month its own head count is just about right.
Of course, like all e-commerce sellers, Etsy is exposed to macroeconomic risks. The company’s own data showed a slight decline in gross merchandise sales per active buyer on a trailing 12-month basis in the second quarter after at least 11 quarters of growth. Perhaps there is another shoe still to drop.
But for this risk, there are good potential rewards. Despite their recent rally, Etsy’s shares are still fetching just under 23 times forward enterprise value to Ebitda, compared with their five-year average of around 30 times.
In this market, it might just pay to get a little crafty with your stock picks.