ETSY buyers and sellers

Investment Analysis Clubs Saul’s Investing Discussions
1

In talking with several fellow investors here on the board and elsewhere, it seems like the main concern with Etsy is that they’ve had a Covid spike that’s in no way sustainable, and that growth will revert back to 30% YoY or maybe less. I’ve been looking for clues as to whether or not that’s the case, and one thing that jumps out to me as a trend with some staying power is the increase in buyers and sellers on the site.

Active Buyers (in millions)

        Mar    Jun    Sep    Dec
2018   34.7   35.8   37.1   39.4
2019   41.0   42.7   44.8   46.4
2020   47.7   60.3   66.6

Active Buyers (Sequential)

        Mar    Jun    Sep    Dec
2019    4%     4%     5%     4%
2020    3%    26%    10%

Active Sellers (in millions)

        Mar    Jun    Sep    Dec
2018   1.97   1.98   2.04   2.12
2019   2.23   2.33   2.59   2.70   
2020   2.81   3.14   3.68

Active Sellers (Sequential)

        Mar    Jun    Sep    Dec
2019    5%     4%    11%     4%
2020    4%    12%    17%

As you can see, the June 2020 quarter was the largest increase for both Buyers and sellers active on Etsy. But September was the second biggest ever increase for buyers (by far), and it was an even bigger increase for Sellers than in June!

These are really impressive continuations to what happened in the June quarter. Personally I think this is a network effect. Whatever the case, it is definitely worth considering that the uptrend for Etsy have more staying power than you think.

Bear

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2

Beth Kindig on Twitter last Friday with first week of November data on who is hot this Season. Top of the list? $ETSY w/ 87% growth tops her list.

https://twitter.com/Beth_Kindig/status/1329800181747912706

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Yes that is an astute observation.

I think the cohort analysis they provided on the Q3 call was also telling.

“For our new buyers and reactivated buyers, our newer cohorts, we’re seeing LTV increase driven by higher frequency and an increasing AOV”

They did caveat that statement, they are still unsure if this behaviour will continue in the long term, but I’m fairly confident it will stick, the world is getting very used to shopping online more and more.

4

I agree with Bear’s thesis. This piece nicely describes the dynamics of how ETSY grew both buyers and sellers, and makes the case that it is not likely to be transitory:

https://www.marketplacepulse.com/articles/etsys-face-mask-ho…

-WSM
(Long ETSY 9%)

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5

Just purchased an arcade cabinet from Etsy for something fun to do during the Holiday season, while we are bracing new lockdowns and cold weather out east.

Not only I was able to get a custom order from a custom shop in the US, but the price was about a third from other options available outside of Etsy. It is important to note that their sellers were listed in the top of the search results in Google and showed up as a product search result with competitive price.

Etsy aggressive advertising on Google helps this sellers, and I think the platform is very sticky, it just takes time to get used to new way of shopping for unique products.

I’ve been using wayfair also for the first time this year, so there is definitely potential in any of these non Amazon platforms moving forward.

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6

Bear makes an important observation: one thing that jumps out to me as a trend with some staying power is the increase in buyers and sellers on the site.

In addition to the increase in the number of buyers, the buyers appear to be spending more as well. Also, there are more repeat buyers and habitual buyers. This suggests that although a number of first time users may have come to the platform looking for masks or a Covid-related purchase, once they found the platform, they liked it enough to return.

Etsy’s Q3 report discusses some changes they have made to improve the experience for buyers and sellers and help them find what they need more efficiently. These moves should help ensure that new buyers and sellers become repeat and habitual.

This is from the Third Quarter 2020 Highlights (boldface mine).

In terms of third quarter 2020 GMS per buyer, when using data for our 2018 buyer cohort as a proxy for how our historical cohorts have performed, existing buyers have increased their GMS per buyer by more than 50% in the third quarter of 2020 when compared to the third quarter of 2019, even when excluding face mask purchases.

We have also seen an increase in the value of our recent new buyer cohorts when measured by GMS per buyer. For example, a buyer in the second quarter of 2020, whose first purchase was not a face mask, spent 50% more in their subsequent purchases in the first 90 days on Etsy than a new buyer in the second quarter of 2019.

GMS excluding mask sales for the Etsy marketplace was $2.2 billion, up 93% year-over-year . . .

Habitual buyers, buyers with 6 or more purchase days and over $200 in spend in the trailing 12-months, grew 104%, outpacing overall active buyer growth, and repeat buyers, buyers with 2 or more purchase days in the trailing 12-months, grew 70% in the third quarter.

https://s22.q4cdn.com/941741262/files/doc_financials/2020/q3…

I have started a small position (0.7%) to follow ETSY more closely and am considering adding.

All the best,

Raymond

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Beth Kindig on Twitter last Friday with first week of November data on who is hot this Season. Top of the list? $ETSY w/ 87% growth tops her list.

To be clear, this isn’t necessarily Beth’s list. These numbers are based off of analysts estimates for the next quarter. (Unless her numbers are the same as the others)

8

Bear, I was all set to go out and buy a starter position in Etsy. It seemed to be a smart company. I also loved that sellers could use a little video describing themselves. But the killer for me was looking at their last two earnings reports:

GMS fell from $2.689 to $2.634, or down 2% sequentially.

Revenue grew from $429 to $451, or up 5% sequentially

Marketplace Revenue grew from $332 to $342, or up 3% sequentially

Net Income fell from $96.4 to $91.8, or down 5% sequentially

Adjusted EBITDA grew from $150.6 to $151.4, or up about 0.5% (a half of one percent) sequentially.

So how I read this is that they got a huge boost from Covid, and people who were temporarily out of work making things by hand to make some income, and the year-over-year results look great, but the sequential results show NO growth at all (+5%, +3%, +0.5%, -2%, -5%), even with more sellers and buyers. Just compare that with the figures you posted on Docusign. Etsy is not going to show 100% growth next year! Or 50% growth. Or 40%… well you pick a number. Granted, the Xmas season will be good, but they are going nowhere next year with flat sequential growth.

Oh, and I just noticed that Free Cash Flow fell from $220 to $183, or down 17% sequentially.

Would love to have your take on this.

Saul

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9

Sure, Saul, here’s my take.

GMS fell from $2.689 to $2.634, or down 2% sequentially.

Revenue grew from $429 to $451, or up 5% sequentially

Taken together this is actually pretty encouraging. SHOP’s GMV was basically flat from Q2 to Q3 as well, and it’s not hard to see why. People spent more than ever online in Q2, and I wouldn’t have been surprised to see a 10% or 20% drop in Q3. Flat sequentially is great! Also, for revenue to go up when GMS was flat (actually down 2%) is awesome – to me that looks like Etsy is finding other ways to profit and/or take rate is increasing. Their services revenue was up 14% sequentially!

I’m not worried about Net Income at all. It was lower in Q3 2019 than Q2 2019 as well. Probably just due to seasonality of their OpEx. But look what adjusted EPS has been the last two quarters: 75 cents and 70 cents! Let’s pencil in 1 dollar in Q4 (I think it could be way more) and let’s just say 75 cents in Q1 2021, that’s $3.20 for the 12 month period. Not bad! With shares at $142 right now, that’s a PE of about 44!

I agree with you that Etsy won’t grow at 100% next year. But I don’t think we can really know what’s to come. I’m not sure they won’t flirt with 50%, though. Who knows!? I can’t tell you if ecommerce will grow 20% or 30% or what next year, but I think it will grow fast for a long time. And I think Etsy and Shopify and others will grow faster than ecommerce as a whole. Etsy’s my favorite right now and I own SHOP too.

Bear

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10

Their services revenue was up 14% sequentially!

Bear, do you have any idea what “Service Revenue” is made up of for Etsy? Usually Service Revenue is one-time revenue and not something at all recurring.

Saul

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11

Usually Service Revenue is one-time revenue and not something at all recurring.

Are you thinking of “Professional Services” revenue, like with Okta and many other software companies? No, I think Etsy’s Services revenue is like Square’s, ie, recurring. I think it includes things like Etsy payments.

Bear

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12

Taken together this is actually pretty encouraging. SHOP’s GMV was basically flat from Q2 to Q3 as well, and it’s not hard to see why. People spent more than ever online in Q2, and I wouldn’t have been surprised to see a 10% or 20% drop in Q3. Flat sequentially is great!

Bear, I’m not sure I understand your reasoning on this. Look at our other companies! They all grew revenue sequentially by a respectable percentage in the last quarter, and most grew by more than in the previous one:

Zoom grew 74% sequentially and then 102% sequentially.
Docusign grew 8% sequentially and then 15% sequentially.
Cloudflare grew 10% sequentially and then 14% sequentially.
Datadog grew 7% sequentially and then 11% sequentially.
Crowdstrike grew 17% sequentially and then 12% sequentially.
Even Okta, that everyone says is “slowing down”, grew 10% sequentially and then 9% sequentially,
etc

None of them were flat or up just 5% and proud of it. You might want to give that last sentence (Flat sequentially is great!), another thought.

Saul

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13

Docusign grew 8% sequentially and then 15% sequentially.
Cloudflare grew 10% sequentially and then 14% sequentially.
Datadog grew 7% sequentially and then 11% sequentially.
Crowdstrike grew 17% sequentially and then 12% sequentially.
Even Okta, that everyone says is “slowing down”, grew 10% sequentially and then 9% sequentially,

Yes but ETSY didn’t grow 8% or even 17% sequentially in Q2. They grew 88% sequentially.

I realize they followed that up with 5% sequential growth in Q3, but not everybody can be ZM. :slight_smile:

Bear

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14

Saul, Bear -

To clarify on “Service Revenue”, the following is taken directly form Etsy’s filings:

Definition: Services revenue is comprised of the fees a seller pays us for our optional other services (“Services”). Services primarily include on-site advertising, which allow sellers to pay for prominent placement of their listings in search results; and shipping labels, which allow sellers in the United States, Canada, United Kingdom, and Australia to purchase discounted shipping labels.

Latest Quarterly Update: Services revenue increased $134.3 million, or 93.0%, to $278.7 million in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The growth in Services revenue was primarily driven by an increase of 88.7% in on-site advertising revenue, which represented a significant majority of the overall Services revenue increase, and, to a lesser extent, an increase in shipping label revenue of 163.0% from the prior year. The increase in advertising revenue was primarily due to higher click volume on Etsy Ads (formerly Promoted Listings). The increase in shipping label revenue was primarily driven by an increase in label volume.

Although Etsy is very different than SHOP, or any other ecommerce marketplace for that matter, I do believe that the main reason for its relatively discounted multiple, is the lack of recurring revenue that it generates. I added notes from management’s latest call on post 73564 here (apologies for the formatting issues).

Etsy is certainly an intriguing business with plenty of room to grow given its ~$17B market cap. However, I can appreciate the reluctance from investors stemming from the degree of stickiness post-COVID, and the potential to generate additional revenue streams (hopefully recurring ones).

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15

Small point from me here:

GMS excluding masks slightly grew sequentially 1,4%. This is basically and in line with SHOP`s GMV growth in the same quarter as mentioned by Bear.

I guess that if the customers‘ shopping habits really changed due to Covid and after „normalization“ in post-vaccine world Etsy can grow in 50s+ instead of 30s in pre-Covid times the market will push the multiple up. We won‘t know for sure till next few quarters.

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16

Just purchased an arcade cabinet from Etsy for something fun to do during the Holiday season,

Isn’t ETSY just an international version of E-Bay? Doesn’t sell anything itself? Is a middle person between sellers and buyers?

17

ETSY exploded from a pre-Covid high of $62+ to a pandemic-driven high of $153+ a month ago, 10/13. I bought in August at 132 on a mechanical screen.

For what it’s worth I saw the numbers Saul lays out and made the judgement: short term bubble ramp, not sustainable. Once it got taken down another 10%, and volatile, in early November I bailed at $115 at the so-far-November low.

For what they do, their stock price at 100%+ double what it was 6 months ago seems a selling opportunity. A year from now when the global economy is more normalized, ETSY’s buying and selling traffic will likely not be as high as it was in August or is now.

YMMV

18

I’ve been looking for clues as to whether or not that’s the case, and one thing that jumps out to me as a trend with some staying power is the increase in buyers and sellers on the site.

Bear, I’m not sure I understand your train of thought here. The sudden increase in buyers certainly explains the revenue spike. And yes, if there are more buyers, network effect would result in more sellers. But how does it explain staying power? Couldn’t the sudden ramp up in buyers in Q2 be followed by an equally sudden decline at some point in the near future?

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19

Bear,

Here is another important concern I have about Etsy besides the flat sequential results.

Look at Amazon for comparison. I looked at what I have ordered recently from them in the last month or two. As you read the list, you will see that every single one of them except the final three are completely and absolutely guaranteed recurring revenue for Amazon and their sellers.

Vitamins
Non-prescription medications
Zip lock storage bags
Fabric Conditioner
Cascade dishwasher pellets
Kindle books
Rinse-Aid for the Dishwasher
Toilet Paper
Kleenex
Paper towels
Replacement electric toothbrush heads
Razor blades
Toothpaste
Starbucks French Roast Coffee
Citrical
Twinings Tea
Seeds of Change microwaveable packets of rices and grains
Light bulbs
Plain envelopes
Kitchen cleaner spray
Stain remover spray
Womens blouses
Nasal spray
Reynolds wrap aluminum foil
Shaving cream
Laundry detergent
Little bottles of spices and herbs (cinnamon, ginger, dried shallots, etc
KitchenAid scissors
Small hand exercisers (recovering from broken shoulder)
Canon printer
etc

When I look on the Etsy website, there is almost nothing that is a guaranteed recurring purchase. It’s almost completely one-time purchases.

To me that is a big red flag.

Saul

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20

I went to the ETSY site and saw that a lot of what they offer are for special occasions. Occasions like birthdays, anniversaries, holidays… all of which, hopefully, are recurring events that translate into recurring revenue.

I am not long ETSY , yet, but when I saw the business model where recurring revenue seems to exist, it makes me want to look at ETSY a little more closely.

FP

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