Hi All,
I’m interested in doing some contract writing for the Motley Fool so I wrote a “practice” article in the Fool style. Any feedback or comments are welcome. 
Is ETSY stock a buy?
The most recent quarter was very strong, but does this niche player have room to grow?
Etsy (ETSY) is an e-commerce company that operates a global marketplace where people can make, sell, and buy unique goods online. Spurred on by the pandemic, Etsy has become the go to online marketplace for handcrafted goods. The stock is up nearly 4X over the last 12 months and the company looks to be gaining even more steam, based on its recent blow-out earnings report. With the company trading near all-time highs, investors may be wondering if it’s too late to get into this stock. It is certainly not. Here are five reasons to be optimistic about Etsy’s future and why it still is a buy today.
- It is one of the most recognized U.S. e-commerce brands
Etsy is now the number four e-commerce site in the USA with roughly 223 Million visits a month. https://disfold.com/top-e-commerce-sites-us/ As CEO Josh Silverman noted in the conference call “People suddenly mention Etsy in the same breath as much larger retailers like Walmart or Target or eBay.“ Elon Musk, with a following of nearly 50 million, recently tweeted “I kinda love Etsy”, after he bought his dog a hand knit wool sweater. Remember the Bernie Sanders mitten meme from the presidential inauguration? Etsy’s artists took advantage of the moment and sold $1.9 million on the platform in Q1. This showed the power and flexibility of the platform to respond quickly to deliver products that people need and want.
- Etsy’s growth story just isn’t about masks anymore
Early on in the pandemic, the Etsy growth story had a lot to do with COVID-related items. Masks accounted for $346 million of gross merchandise sales (GMS), the total value of all sales on the platform, in Q2 of 2020. The exciting thing is the masks brought in new buyers, a large portion of which are coming back for other products. 50% of people that bought masks in the 3rd quarter came back in the 4th quarter and bought something else. “Habitual buyers”, defined as those who purchased more than six times in 2020 at minimum of $200 dollars, grew to 6.5 Million, an increase of 157% Year-over-Year. Masks now make up only about 4% of GMS (versus 14% two quarters ago) so the growth story is truly astounding and much more than just a story about mask sales.
- Etsy is expanding its International reach
Etsy’s success hasn’t been limited to the United States. International sales on the platform make up 41% of the total, up an incredible 152% year-over-year. According to Comscore, Etsy has become a top-five e-commerce site in the U.K, with platform sales up 189% year-over-year. GMS was also strong in Germany as it more than doubled. It is now Etsy’s second largest international core geography. It also added India, the second most populous country in the world to its core market of six countries, now making it lucky number seven. Besides its large population, India boasts low prices on yarn and other handcrafted raw materials, which is likely to make it a great addition to the family.
- Etsy is showing strong operational leverage as it scales up its revenue base
Operating leverage is a cost-accounting formula that measure the degree to which a firm can increase operation income by increasing revenue. In a very positive sign for investors, Etsy is showing that net income, earnings, and free cash flow are all growing faster than the top line and even total platform sales. Net income for the fourth quarter of 2020 was $149 million, up 375% year-over-year. Fourth quarter total revenue was $617 million, up 129% year-over-year. Free cash flow in Q4 increased by 250% from $192 million to $672 million. And finally, gross margins have been steadily improving quarter by quarter, going from 64% in Q1 to 76% in Q4. Operating leverage becomes increasingly important as a company scales. Investors have a right to be upbeat as Etsy is showing high leverage as it sends more and more of its revenue to the bottom line.
- This massive market opportunity is worth the price
Etsy is expecting revenue growth of 125% to 135% in Q1 with revenue of $513 million to $536 million. Etsy currently trades at a PE of 86, down from the recent high of 93. That may sound expensive to some investors, but as a point of reference, Amazon is trading at a PE of 75. Even market favorite Starbucks is trading at a triple digit price-to earnings ratio as it deals with slower demand and higher expenses related to the pandemic. Next to those market stalwarts, Etsy’s PE of 86 seems reasonable, especially given its massive growth and smaller market capitalization. In the spring of 2019 Etsy defined its TAM (total addressable market) at $100 Billion. However, during the Q2 earnings call, Silverman noted “that the size of Etsy’s addressable market starts with a T not with a B.” Spurred on by the pandemic, Etsy now competes in almost every market in the world. This niche e-commerce player has plenty of room to run.
Bottom line for Investors
Etsy has carved out a defensible niche; 88% of buyers surveyed by Etsy said they came to the website because they couldn’t find their product anywhere else. Covid-19 didn’t just force people to shop online, it pulled e-commerce adoption ahead by 4 to 6 years according to Forbes Magazine. https://www.forbes.com/sites/johnkoetsier/2020/06/12/covid-1… Etsy’s triple digit growth numbers show it has taken full advantage of the consumer pivot to online purchasing and will likely continue to do so for the long term. Add in the fact that Etsy is now the nation’s number four e-commerce website, is expanding at a healthy rate internationally, and it trades at a reasonable valuation. This stock is a buy for investors with a long time horizon.
-FoolishJeff (Jeff Koller)