Etsy - how 'special' is 2021?

Evening all.

I’ve held a high conviction in Etsy for a while but after looking closely into their Q4 earnings call, it is quite clear management are worried of rough waters ahead.

On first look, things look great for Etsy, coming out with incredible guidance for Q1 2021. But the CFO made several comments about how February was trending down from January on both GMV and take rate and how analysts should use third party estimates of worldwide ecommerce growth to forecast 2021. I’ve had a look at consensus and it is 14% this year. Now Etsy state they aim to beat the general e-commerce market, they did it by 2x last year, so if we assume a similar trend, it suggests management is thinking along the lines of 30%.

I’ve modelled out what I think their revenue will be in 2021:

Q1 - $540M vs Q1 228m in 2020 - as per Q4 call, Feb is trending down
Q2 - $500M vs Q2 428m in 2020 - lockdowns start to unwind, mask revenue gone
Q3 - $450M vs Q3 451m in 2020 - tough comps in the summer
Q4 - $700M vs Q4 617m in 2020 - should grow on their great Q4 in 2020

Based on these numbers, they’ll hit around 27% growth for the year. They were growing at about 33% in 20219 before Covid.

I may be being too pessimistic on the revenue growth, but after digesting the CFO’s comments, they are definitely warning us. Using their 15x multiple right now, this doesn’t suggest much upside is left for the rest of this year. Or does their impressive margins and bottom line see an expansion of the multiple?

Now, I am excited on what they can do on an international level, especially India, there is no doubt the brand is powerful now and the 2020 cohorts will be coming back, but will that be enough to deliver above 30% growth? I’ve been spoilt on a diet of 50%+ growers and I’m in two minds on Etsy in the short term.

Would love to hear any thoughts from the board.

29 Likes

Prior to the pandemic, Etsy was growing GMS by 20-30% YoY and on a TTM basis, around 6-8% in the few quarters prior to the COVID bump. I’m going to be using this as some sort of guideline in my forecast.

Per the CC, if Q1 represents the “high water-mark” for take rate which is 17.3%, then I think with Etsy Ads/services adding to the overall rate, it’s fair to assume take rates of 17-17.1% for Q2-Q4.

In the CC, management said: January was very strong, but it was clear to us it was helped in part by a tailwind from stimulus checks.

So, since there was another round of stimulus checks which was 2x+ bigger than December’s stimulus checks, then I think it’s fair to assume that this will kick in late March and into April. Also, with the economy reopening, there will likely be more jobs and more money that will be flowing, some of which will flow into Etsy. Mask revenue only made up 4% of GMS in December, so I doubt it’s going to be material in Q1, so I think it’s fair to assume GMS will continue to grow QoQ, albeit at a much slower pace.

I think conservatively:
Q2: $3.35 B in GMS / $571 M in revenue - 33% revenue growth
Q3: 3.4 B in GMS / $580 M in revenue - 28% revenue growth
Q4: $4.4 B in GMS / $757 M in revenue - 23% revenue growth

This averages out to 42% revenue growth for the year which isn’t bad. It’s definitely a slowdown, but there are some pretty tough comps. I personally think they will outperform the above estimates, but again who knows.

I think the major growth drivers this year are international and their services revenue. Services revenue grew 79% YoY and in their March 2021 presentation, they noted that Germany and UK are both growing high triple digits. They also continue to add more and more buyers which I think should help fuel the two-sided marketplace.

16 Likes

I may be being too pessimistic on the revenue growth, but after digesting the CFO’s comments, they are definitely warning us. Using their 15x multiple right now, this doesn’t suggest much upside is left for the rest of this year. Or does their impressive margins and bottom line see an expansion of the multiple?

andrew

I see your growth projections and they don’t seem to reflect the information that I gleaned from the Etsy earnings call.

Just to summarize a few points.

Rachel Glaser reported on 4Q.

GMS +118% to $3.6B

Rev +129% to $617M

Adj’d EBITDA $192M

Int’l GMS +140%

They added India as a core market,raising the no. of focus markets from 6 to7

ETSY growth is now distributed over 50 retail categories.

They have expanded their ads program to include offsite ads.

Expanded payments platform and a take rate which increased to 17.1% i +151% Y/Y
n Q4

Gross margin was 76% up 920 basis points from the prior year.

Consolidated market spend $211M up 151% Y/Y

Active buyers up 71% to 81mil

$1.7B cash on hand at year end.

So far it seems pretty positive and I detected no false or weak notes in the presentation, while recognizing that I may have missed some element of nuance in the discussion.

The guidance for Q1 also seemed pretty good.

GMS $3B + or- at 115%-125% Y/Y

Rev $513-$536 +125-135% Y/Y

Adj EBITDA $168-$178 M with a 34% margin.

with the implication that these were conser

10 Likes

I appreciate that there are both quantitative reasons (the actual numbers) and also QUALITATIVE reasons to invest in a company. And I think that’s okay. I won’t invest in anything when the quant isn’t there a priori, but within a certain target (of which I believe Etsy falls into) I am going to use a qualitative analysis to decide my degree of conviction. Even if qualitative is somewhat synonymous with my GDG (god damn gestalt).

To that end, I have a high degree of conviction in Etsy because it has a MOAT - it is the de facto storefront for a vast number of retailers, crafts(wo)men, and artisans who need and utilize this mechanism to generate revenue. Sure, I can buy a mask; but this isn’t macaroni-glued-to-piece-of-construction-paper arts and crafts: This month alone in our household we ordered high-end accessories for our pets, sleeves and a cover for multiple computers, a $3k dining table, and some jewelry in the over-thousand dollar territory. ETSY is specific to this slice of the consumer market; in my mind it is very different from Amazon and MELI (the consumer cloud ‘big box’ stores), caters to a different type and size of business that Shopify, and monetizes better than PINS (though I own both, and this is one thing I will be watching as I consider adding or shifting from each position)

5 Likes

continuation of previous post which has a mind of its own----

It was implied in the CC that these were conservative estimates and that there was uncertaintainty for the coming year regarding incremental growth, the nature of the stimulus, the 2021 contribution from facemask sales. They also noted that Q1 could be the strongest quarter of the coming year but I didn’t get a clear picture of the rationale for that.

It seemed that the cautionary remarks were standard and perhaps necessary because of the overall uncertainty attendant upon the covid situation.I felt that it was an almost routine caveat and saw nothing that alarmed me.

From your comments it seems clear that you drew different inferences than I.I hope we can pinpoint from whence deriveth those differences.Are we simply getting different readings of the same tea leaves or have I missed something of substance.

Glaser mentioned some uncertainty about the stimulus, but from the looks of things now I’d say that the stimulus is all positive news. I perceive strong growth momentum overriding the caveats referenced in the conf call which I regard as de rigueur.
.

Bear in mind that some people think I am an eternal optimist so I’m looking forward to having you chew up my arguments.

cheers

draj

3 Likes

Here is the relevant comments from the call:

"Our expectation is that year-over-year quarterly growth rate comparisons will be challenging when you eliminate the face mask sales from your forward models.

In 2020, Etsy growth outpaced the broader e-commerce sector. While we are not giving the full year guidance today, it may be informative to look at third-party data and research on how they are projecting growth for the industry this year. It suggests that for the sector, Q1 2021 growth will be approximately in line with Q4 2020 and that the industry will start to more rapidly decelerate starting in Q2 with the majority of incremental growth for the year to be realized in the first quarter.

It remains our ambition to continue to outgrow e-commerce, propelled by the underlying changes we’ve seen in the marketplace and the heightened awareness of our differentiated brand. However, we also know, we hope that as the world opens up later this year consumers will soon be able to spend more of their money on travel. dining and entertainment. And this will create some headwind in Etsy’s growth relative to 2020.”

Some things that bode well for Etsy to continue solid growth beyond Q1:

  1. Brand awareness - #4 ecommerce website and cultural phenom.- Moat.

  2. Covid-19 is not just going to drop off the map. It likely won’t be until the end of summer until we hit herd immunity in the USA. Fall and winter will bring another small wave. Threat of variants at home and abroad still looms along with anti-vaxers. Things will slowly open up but most office dwellers won’t go back until the fall. Also, vaccine rollout is slow in Europe and even slower in developing countries. 41% of GMS is abroad. Ecommerce adoption was pulled by 5 years, work from anywhere is a permanent shift. I can’t see Etsy going from triple digits growth to pre-pandemic numbers (35% in 2019). That makes no sense to me. It is likely to fall somewhere in between.

  3. James clear says it takes 66 days to form a habit. The Habitual buyers cohort is building steam and the habits are becoming ingrained.
    In 2020, 48% of active buyers were repeat buyers, an increase YoY. Even better, habitual buyers – defined as users making six or more purchases and spending more than $200 – increased 157% YoY.

  4. Network effect on both buyers and seller side. Its part of the Moat. Etsy has over 50 retail categories and 223 million visitors a month.

  5. First mover advantage and niche focus. Etsy’s 3.5 million active sellers outnumber the 2.4 million sellers on Amazon’s marketplace as a whole. Improved AI powered search and off-site ads (not bidding like other sites) empower sellers and will continue to do so.
    Etsy is also using machine learning to bring augmented reality (AR) to its platform, especially in the wall art and furniture categories.
    Gig economy tailwinds will push more into
    entrepreneurship, only helping Etsy.

  6. Optionality - Reverb has been a huge success. Why not add more categories or even another acquisition?

  7. Giant stimulus checks - both to buy the stock and buy stuff in the site.

  8. Some categories such as weddings will actually benefit from the reopening of the country and eventually the world.

12 Likes

Thank you guys - interesting points raised.

Draj - I’m normally quite the optimist too, not sure what has got into me?!

FoolishJeff highlighted some of the points. To me, the CFO’s statement was littered with warning signs:

“The industry will start to more rapidly decelerate starting in Q2 with the majority of incremental growth for the year to be realized in the first quarter.”

“We want to call this out as we do not currently expect to have the same tailwind in Q2 and, in fact, can already see that February relative to January is less strong without that boost from stimulus”

Not sure why they don’t expect a stimulus tailwind in Q2 when it was clear another stimulus was getting signed off.

“In total, 2020 face masks exceeded $740 million, with $346 million in Q2 and $264 million in Q3”.

That is a lot of dollar to back out already in Q2 and Q3.

“However, we also know, we hope, that as the world opens up later this year, consumers will soon be able to spend more of their money on travel, dining and entertainment. And this will create some headwind in Etsy’s growth relative to 2020”

Something that may be clouding my judgement somewhat is the differences in lockdowns across the world. Here in the UK shops are shut and it’s been like that most of the past 12 months. You have no choice but to shop online. From what I can see across the pond, the US seems like its been a lot more open, varying a lot by state, and therefore there may be less of a decline of Etsy shoppers because for a lot of Americans buying offline is still an option.

I do agree on all the positives raised above that may offset the negativity above. But at the moment it feels like a fair bit of uncertainty so I may have to move some dollars around until I see it for myself.

1 Like

Sorry just wanted to make clear the face mask numbers were GMV, not revenue.

HPA,

I agree there is uncertainty – I don’t think even Etsy knows what revenue will look like this year. But I don’t see anything to support your numbers here:

> Q1 - $540M vs Q1 228m in 2020 - as per Q4 call, Feb is trending down
> Q2 - $500M vs Q2 428m in 2020 - lockdowns start to unwind, mask revenue gone
> Q3 - $450M vs Q3 451m in 2020 - tough comps in the summer
> Q4 - $700M vs Q4 617m in 2020 - should grow on their great Q4 in 2020

Maybe you could explain how you got to these? I don’t think starting with 2020 numbers and backing things out makes sense. Etsy has progressed each quarter…Q2 might not see (much) sequential growth from Q1, but I don’t understand why it would go the other way. And the 450m in Q3 is especially confusing. Franklin’s “conservative” numbers here (https://discussion.fool.com/prior-to-the-pandemic-etsy-was-growi…) make more sense to me, but I’d love to hear further discussion and support for how you arrived at these numbers I’ve quoted above.

Thanks for the thread.

Bear

9 Likes

Hi Bear,

Sure. So I took the Q1 guidance of $540m and then unwound it from there based on the CFO comments and some traffic data, ie they’ve called out February is flagging and that most of the sequential growth will be seen in Q1. I’ve modelled Q3 particularly harshly because by then, it looks like most of the world will be open again.

SimilarWeb also shows the Feb drop off with a traffic lens, back to Sep 2020 levels.

https://www.similarweb.com/website/etsy.com/#overview

I could be getting the wrong end of the stick here but that earnings call put the wind up me!

1 Like

So I took the Q1 guidance of $540m and then unwound it from there based on the CFO comments and some traffic data, ie they’ve called out February is flagging and that most of the sequential growth will be seen in Q1. I’ve modelled Q3 particularly harshly because by then, it looks like most of the world will be open again.

I guess it will all depend on how strong January was (and how much they fall off in subsequent months, but I just can’t imagine they continue to sell less and less as the year progresses. Going back to 450m (less than Q3 last year) seems implausible, simply because they have so many more buyers and sellers using the platform now – and hopefully more and more joining throughout the next several months.

that earnings call put the wind up me!

I interpreted their comments as, “Hey, just so you know, we’re not going to keep growing at triple digit rates YoY after Q1.”

In the end, how they grow this year is anyone’s guess. The good news is, even if growth is a lot slower than we traditionally like with companies we own, the ballooning EPS is another path to success for ETSY.

Guess we’ll see how it goes!

Bear

6 Likes

“In total, 2020 face masks exceeded $740 million, with $346 million in Q2 and $264 million in Q3”.

That is a lot of dollar to back out already in Q2 and Q3.

Andrew

I have excerpted a few comments by Glaser concerning masks.

Outside of the top six categories, full year growth was 115%, excluding mask sales, powered by segments such as toys and games and pet supplies. As expected, mask sales continued to contract as a percent of overall GMS to 4% in Q4, down from 11% in Q3 and 14% in Q2, a trend which we expect to continue. Following the steady trend of 93% year-over-year growth in Q2 and Q3, nonmask GMS growth accelerated sequentially to 118% in Q4. In addition, we’re seeing very healthy underlying trends from mask buyers. Of the three million mask-only buyers in Q3, approximately 50% returned in Q4 for a non mask purchase.

The growth numbers in Q4 and for the year are exclusive of mask sales. And Glaser sees underlying strength in this growth. So the optimism for 2021 seem to be independent of trends in mask sales.

Further, mask sales as a percent of GMS fell 71% between Q2 and Q4 and represent 4% of GMV. I’d venture to guess they have dropped further…so perhaps not significant in the larger growth scheme.

i conclude that assumptions about future mask sales provide little if any guidance for 2021 revenue growth.

And I wish to restate my belief that the remarks about possible slowing in the in the second quarter are to be expected. It would be a mistake for the CEO to forecast strong growth when there is limited visibility…and moreover a bit of sandbagging is in order.

draj

2 Likes