Etsy: essential and low cost

Etsy manages the top 10 e-commerce platforms in the United States and the United Kingdom, with significant operations in Germany, France, Australia and Canada.

The company dominates an interesting niche, connecting buyers and sellers through its online market for antique and handicraft products.

With a consolidated gross sales volume of $ 13.5 billion in 2021, the company has established itself as one of the largest players in the fast-growing space, generating revenue from listing fees, commissions on sold items, advertising services, payment processing and label shipping.

At the end of 2021, the company connected more than 96 million customers and more than 7.5 million sellers on its sites: Etsy, Reverb (music equipment), Elo7 (crafts in Brazil) and Depop (clothing resale).

Investment thesis

Etsy has created an interesting competitive niche for itself, fighting for the share of e-commerce costs in different heterogeneous verticals in a brandless space.

The company’s four locations – Etsy, Reverb, Depop and Elo7 – all target so-called “uncomoded” inventory (crafts, used musical instruments and antique clothing resale), earn commissions on third-party sales, among peers and seek to create a “treasure hunt” experience. around a unique, flexible and preferably less elastic set of products.

We believe Etsy’s competitive strategy is sound, with a fast-growing company that has taken advantage of the growing demand caused by COVID-19, providing one of the few outlets through which customers could buy face masks at the height of the pandemic.

Although mask sales fell, the platform remained a benchmark, and Etsy saw its active customer base grow to 96 million (an 18% year-on-year increase) by 2021, despite a 2020 jump that attracted 36 million customers (75% growth compared to 2019).

In our view, the two-year cumulative growth of 171% reflects the contributions made long before demand increased: moving the market to the cloud (through a partnership with Google), huge investments in search engine optimization efforts and investments in brand marketing to raise awareness without help.

In the future, we expect Etsy, which recently included a number of Indian retailers, to continue adding a unique product offering, expanding its growing international operations (45% GMV), to continue to improve search functionality and expand its reseller advertising toolkit and options. with periodic targeting of competitively advantageous additional acquisitions that provide exposure to differentiated end markets.

Significant efforts will be made to increase repeat purchasing behavior, with the long-term driver of GMV growth likely to increase average revenue per user instead of gaining customers once the business reaches saturation in its six key markets, leading customers on Etsy “not only for pillows, but for a couch. »

Just value

We are modestly increasing our fair value estimate for Etsy from $ 193 to $ 195 per share.

While the company’s planned investments in platform development and marketing should provide long-term leverage, short-term gross volume of goods (GMV) and the leverage counter-effect are leading to our revaluation.

Our fair value estimate shows a pre-P / E multiple of 69x and an EBITDA multiple of 45x.

The pandemic has provided a huge boon to Etsy, with intricate international supply chains and supply constraints stumbling over larger competitors just as demand for online shopping has risen as shoppers try to replenish their revenue by looking for hard-to-find products (such as face masks). ), and is prevented from visiting most physical channels by mobility restriction measures.

The company capitalized on de facto land grabbing, relying on a market defined by small, agile vendors with short supply chains, selling masks worth nearly $ 750 million in 2020 and seeing GMV doubled to just over $ 10 billion.

More importantly, customers remained loyal to the platform, with the operator retaining most of the 36 million additional customers acquired in 2020 (on the way to 96 million active customers by the end of 2021, more than double the end of 2019) – which is even more important. support our average annual sales growth forecast of around 15% per year until 2026, despite the difficult basis of comparison.

We expect active customer growth to decline during our explicit forecast period, with our model predicting medium-digit growth (4.5%) by 2031, down from about 15% over the past five years.

It seems that investing in the development of the platform, which leads to better repurchase behavior, conversion and ultimately higher revenue per active user, will provide a long-term stimulus for growth, especially since the market took only 4% to 4.5% of US e-commerce consumption. customers in 2021 (based on our calculations and data from the US Census Bureau).

Finally, we believe that the adjusted EBITDA margin is less than 30% of the long-term target, and our forecasts predict an adjusted EBITDA margin of 31.8% by 2031.

We expect double-digit sales growth in the middle of the year to trigger operating leverage on fixed components of administrative costs, product development and (to a lesser extent) marketing costs.

© Morningstar, 2022 – The information contained herein is for educational purposes only and is provided for informational purposes only. It is not intended and should not be construed as an invitation or encouragement to buy or sell the listed securities. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information in this document should not be the only source for making an investment decision. Be sure to contact a financial advisor or financial expert before making any investment decision.

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