ETSY Q2 Blowout

Investment Analysis Clubs Saul’s Investing Discussions
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It’s no secret that ecommerce has benefited from the strange environment that is 2020. So of course tempting to jump on the incredible trend with SHOP or ETSY, or one or more of many others who had incredible Q2 growth numbers. The immediate counter-thought: is this just a temporary spike due to Covid? No one is buying things in stores right now, if they can help it.

Where SHOP is a $120b company, ETSY is a $17b company, and their revenue growth actually outpaced SHOP’s in Q2 (although SHOP has almost twice as much revenue, so of course it deserves a somewhat larger market cap). After guiding for 30% growth this year pre-covid, in May ETSY guided for 340m for Q2, which would have been a 90% YoY increase. But when they reported Q2 on August 5th, revenue was actually 429m – a 137% increase. Then they promptly guided for 426m in Q3, a 115% increase (which they’ll surely beat). So it appears revenue will be almost double what they had expected this year (although wisely they’re not giving full year guidance).

A reasonable question at this point would be: what’s the catch? Why is the market not buying this and bidding Etsy up? Perhaps because Q3 guidance is basically flat with Q2? Or maybe it has more to do with what Etsy was, and how it was growing, before Covid accelerated things. Personally what tempers my enthusiasm is wondering what Etsy’s special sauce really is.

Is the TAM too big, or too small? Whereas SHOP provides a service, ETSY is a marketplace (like Amazon). You can’t “go to Shopify” and search for your item like you can on Amazon…or Etsy. It’s kind of a virtuous cycle: more people “go to Etsy” to search for whatever, Etsy’s customers (merchants) succeed because of those people shopping on Etsy, and Etsy succeeds. The problem is, that’s exactly how Amazon works. Etsy can’t out-do Amazon at Amazon’s game, so what makes Etsy different?

This is where I feel Etsy management missteps. They seem to say Etsy is selling something different, and they consider their sellers/merchants to be artisans and artists and craftspeople. And then they say their TAM (which they estimated last year as 100b) is now over 1 trillion, and they seem to imply that it includes anything that can be sold online. Can’t have it both ways. And that’s why I’m struggling with the investment. What makes Etsy special? What makes the sellers different? What buyers do they attract?

Like SHOP, with ETSY it’s all about their merchants. If we believe Etsy’s sellers / merchants will do well, we can expect that Etsy’s revenue will recur, and grow.

I welcome thoughts from others. I would be especially interested to know if anyone here is an Etsy seller (aka merchant, artisan).

Bear
long ETSY with a 2% position for now

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First post here.

I don’t know anything about Etsy, but I can speak about Amazon from experience as a seller in their 3rd party marketplace.

I did a quick search for Etsy’s return policy and found they do not require refunds unless it is part of the seller’s policy. You can open a case with Etsy if you received a product different from what was described, but this requires manual intervention.

Amazon’s policy is to grant refunds automatically for ANY reason. You can buy something, never open the box and send it back, usually with free return shipping. The seller eats Amazon’s “pick and pack” fee which can vary widely. It’s significant though, usually no less than 10-15% of the item cost. They also charge a small return administration fee. And then it’s up the warehouse worker to decide if the returned item is acceptable to re-sell. I can assure you those warehouse workers do NOT care. I’ve had dirty broken returns placed back into my new sellable inventory only to be resold to another customer who then returns it again, gets placed back into my new sellable inventory, and the cycle continues. I’ve also had brand new unopened inventory marked unsellable which means I either pay to have Amazon dispose of it or send it back to me. If it’s in good shape, I can pay to send it back to Amazon again.

This would never work for Etsy sellers. I don’t see Amazon wanting in on this business.

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Bear,
I looked at ETSY over the weekend not too detailed research though. Some points:

ETSY stock has performed better YTD than CRWD, DDOG… Vow.
My concern is that while it seems to be an interesting place to go to for unique goods, I don’t see how it becomes an e-commerce marketplace like Amazon for all goods. Just a check almost everyone who reads has used Amazon multiple times. How many have used ETSY?
Another issue that I saw was that during Covid there was a huge number of DIY mask sales. While this brings new users will they stay around for other unique products?

I find PINS capable of attracting more users and as a result a larger TAM. I know there was some discussion here and you were in it briefly. Its valuation seems ok. Question of course - is there a long runaway of 30-40% rev. growth for that stock?

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For me, the issue is selling reportedly hand made crafts which limits its potential for scaling.

While I’ve purchased a few things here or there, mostly as a novelty, buying “home made” with no physical presence makes me unsure about durability and quality. While a mask, party favors, or something decorative are probably fine, it’s hard to pay more for something with less protection (in the form of returns).

I’ve also given up trying to buy “undervalued” as I’ve come to realize I can’t predict when the market will decide to value something higher or lower.

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What makes Etsy Special? IMHO it is:

  1. Community: The community is loyal and does not compete with itself like Amazon does with it’s 3rd party sellers. It’s clearly carved out a defensible niche as it strives to “keep commerce human.” In a sense, it is the anti-Amazon.

  2. Omni-Channel Potential: It sells much more than arts and crafts. Homewares and furnishings sales were up 128% YoY and Beauty and Personal Care Items were up 187%. Last year it purchased Reverb, an on-line seller of musical instruments, which were included in last quarters numbers.

  3. Adaptability: Self-employment fueled by the internet is on the rise and Etsy clearly empowers its sellers. For example, Etsy was able to mobilize a large chunk of its sellers quickly to quickly sell $133 million dollars of masks in April alone.

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Bear - my 3 concerns with Etsy are:

  1. The TAM for home made / craft products, (I have no idea what it is or how much it is worth but can’t believe it is anywhere near the total etailing market place value).

  2. The non-Covid “normal” growth rate which was ~mid 30%s, (Shopify was nearly 50% higher at ~high 40%s). As far as new normal goes - I would think they might both end up at proportionately the same differential in post covid world.

  3. To what degree its current growth is a single product (face masks)at a single point in time (CV-19), that goes to zero in normal conditions.

On valuation and current covid performance basis, sure Etsy looks great but…

Mid to longer term is it really the growth stock to own or just a relative value play?

Ant

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As for masks, performance without masks has been outstanding too. Non-mask sales grew 93% in the second quarter, accelerating versus a 79% increase in April. Masks are bringing more buyers and sellers to Etsy, and chances are that these users will remain on the platform when the pandemic is over to a large degree. Its a classic case of the network effect.

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The 93% non mask sales growth is intriguing. Do you have any insight on why the CEO is claiming that the TAM has gone up from $100B to 1T because of Covid?

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The 93% non mask sales growth is intriguing. Do you have any insight on why the CEO is claiming that the TAM has gone up from $100B to 1T because of Covid?

Texmex,

Read the conference call! Sorry to yell, but I mean you really just must…it’s the #1 best place to start when you’re looking into a company. You can’t believe what people say on message boards unless it goes along with what the company themselves is saying – and to know what the company is saying, you have to get it directly from them!

CEO Josh Silverman: In fact, if you go back to our Investor Day in March of 2019, we made an attempt to size our TAM at that time. And what we said is, if you look at just our top six countries and you assume that Etsy competes only in those top six countries and then you make a second assumption that online is a completely different market from offline. And then you make a third assumption that special is distinct from everyday products. If you believe each of those three assumptions, the market opportunity for Etsy is $100 billion.

But in fact, COVID has helped to explode each of those three assumptions. Etsy competes in almost every market in the world not just the core six. And in fact the distinction between online and offline has all but evaporated in the past few months. And we’ve learned that you can inject the special event of Etsy into everyday purchases as well. Etsy is there for so many purchases for so many different people. So when we pull back and look at what we’ve learned over the past three months, it reinforces my belief that the size of Etsy’s addressable market starts with a T not with a B.

Bear

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It’s no secret that ecommerce has benefited from the strange environment that is 2020. So of course tempting to jump on the incredible trend with SHOP or ETSY, or one or more of many others who had incredible Q2 growth numbers. The immediate counter-thought: is this just a temporary spike due to Covid? No one is buying things in stores right now, if they can help it.

Bear, thanks for introducing me to ETSY, very interesting indeed. Comparing ETSY to SHOP I would say that Shopify is for globalized merchants while Etsy is for local merchants meaning they don’t really compete.

I don’t think Etsy is a covid-19 spike. Globalization has created a lot of unemployment in America and resourceful people are becoming self employed. Before the WWW it was very difficult to be self employed and have a large market, they were restricted to servicing only their local markets. The WWW changes all that, now the self employed can reach the world.

Shopify: global resellers
Social media: internet content
Etsy: self employed
Zoom: work from home
Teladoc/Livongo: healthcare

This will not end with covid-19, this is a paradigm shift in employment with a variety of platforms servicing various employment categories. This is what “Unscaling” is all about. It’s the continuation of a longer trend. The industrial revolution brought vertical integration. The knowledge revolution brought about the value chains at the end of the 20th century. Unscaling is atomizing the value chain.

Economies of Unscale: Why Business Has Never Been Easier for the Little Guy
by Hemant Taneja
October 01, 2013

The American worker just can’t seem to get a break. Automation is wiping out whole job categories, from cashiers to machine-builders, while pressures from globalization, trade, and new Internet-driven business models have disrupted industries and displaced hundreds of thousands of workers. And the prescribed solution — education — is becoming increasingly unaffordable for most Americans.

But the tide is about to turn. A series of breakthrough technologies and new business models are destroying the old rule that bigger is better. By exploiting the vast (but cheap) audience afforded by the Internet, and taking advantage of a host of modular services, small becomes the new big. The global business environment is decomposing into smaller yet more profitable markets, so businesses can no longer rely on scaling up to compete, but must instead embrace a new economies of unscale.

https://hbr.org/2013/10/economies-of-unscale-why-business-ha…

Denny Schlesinger

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Etsy seems more like an EBay than Amazon to me. It might be interesting to compare the two. Etsy has a more sophisticated feel than EBay and showcases the products.

I have been buying on Etsy lately, a lot of things, just last week. I think it is some pandemic restlessness and desire to nest and update the house and wardrobe a bit. The last times I purchased were for a personalized dog collar and before, for nice soap. But I can go a long time between purchases.

I do not see myself becoming a big Etsy shopper but that is ok. They just need enough sellers and buyers to make a good growing market.

How will Etsy drive customer engagement for the long term? We can say that’s not their job, but they will need customers.

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I had owned a starter position in ETSY through 2019, but sold it in early March of this year thinking the company would suffer due to Covid (ME: slaps hand to forehead). I was obviously very wrong. I had owned it previously because the company had flirted with 40%+ growth, and shown some pricing power by raising prices in 2018 (https://www.wsj.com/articles/online-craft-marketplace-etsy-r…)

What makes them special? I thought FoolishJeff’s answer was insightful and I agree with his points (https://discussion.fool.com/what-makes-etsy-special-imho-it-is-1…)

1) Community: The community is loyal and does not compete with itself like Amazon does with it’s 3rd party sellers. It’s clearly carved out a defensible niche as it strives to “keep commerce human.” In a sense, it is the anti-Amazon.

2) Omni-Channel Potential: It sells much more than arts and crafts. Homewares and furnishings …

3) Adaptability: Self-employment fueled by the internet is on the rise and Etsy clearly empowers its sellers.

Amazon has an Etsy competitor called ‘Handmade’ that they started in 2015 (https://www.amazon.com/Handmade/b?ie=UTF8&node=112604320…) but it seems Etsy has managed to successfully keep market share.

When I asked myself the question “what makes Etsy special?”, and when I compared it to Amazon, I sort of thought of Etsy as the cool indie record store (think John Cusack in High Fidelity) and Amazon as the Big-Box Mega Music store. Etsy harvests a scene that Amazon can’t capture. The Buyers and Sellers of Etsy use Etsy specifically because it isn’t Amazon. I’ve personally ordered a few items from Etsy for gifts and the products do have a different feel. They are more artisan and “hand made”. And that is nice for a gift. But I still spend way more on Amazon.com for everyday products.

As an additional note, Etsy is an ESG play. The company empowers sellers in the US, and around the world, by enabling them to sell products into a much larger market than they would be able to without Etsy. For instance, Nigerian artists (https://www.etsy.com/shop/CAREafrica).

As far as Etsy’s CEO claiming that Covid broadened their TAM by 10x from 100b to 1T, to me it seems dubious for him to make that claim without offering specific reasons in the same paragraph. But perhaps, he simply gives FoolishJeff’s three points above creedence, and is extrapolating further into the future. Either way, 100b is still a large number.

Re: A reasonable question at this point would be: what’s the catch? Why is the market not buying this and bidding Etsy up?

If I were to try to guess what the market is thinking, I would guess it simply just sees the growth as temporary. I myself sold out of Etsy in March. Half of that decision was because I thought Covid would cause a serious slow-down in revenue (again I was wrong). But half of that decision was based on their Q4 2019 results – their revenue growth was only in the 30%+ range again . I was hoping for a re-acceleration back into the 40%+ range. However, once it became apparent that Covid was giving them a serious boost, I never re-entered because my thoughts exactly were that it will be temporary. But maybe I’ll be wrong again, maybe Etsy will continue to sustain hyper-growth post-Covid.

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Bear and Denny,

I like your enthusiasm.
Here is a site comparing ETSY to SHOP. Interesting info. ETSY definitely has a place but seems niche…
https://www.nchannel.com/blog/shopify-vs-etsy/

Look at what ETSY says that can be and cannot be sold.
https://www.etsy.com/legal/sellers/#allowed

Etsy is a unique marketplace. Buyers come here to purchase items that they might not find anywhere else. Everything listed for sale on Etsy must be handmade, vintage, or a craft supply.

This is very limiting to the TAM. I am not sure how the CEO can claim “special” is not distinct from “every day”. The words are antonyms! The pandemic has certainly boosted ecommerce and his point #2 is well taken. That is what has propelled even companies like W to do even better.

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  1. Large and Expanding TAM -Even if CEO Josh Silverman is exaggerating a bit on the TAM, Etsy only did 2.5B in GMV last quarter and approx 4.7B in all of 2019. There is a huge opportunity here. The push from 6 core countries to a much bigger global reach cannot be underestimated.

  2. Expanding into new product categories. The company has long focused on its top six product categories — home furnishings and housewares, clothing, jewelry and accessories, craft supplies, paper and party supplies, and beauty and personal care. In the second quarter, 25% of GMS came from emerging categories, like toys and pet supplies.

  3. Increasing Brand awareness.
    The pandemic is shining a light on Etsy and its brand is creating a lot of buzz on social media. 1/3 of buyers who bought a mask came back and bought something else within 3 weeks. Clearly, the COVID-19 pandemic has initiated a shift to online marketplaces everywhere, which should benefit Etsy in the long-run.

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I won’t speak to Etsy’s TAM or growth opportunities, etc which much smarter people than me on here have already chimed in on. I’ll just add these two cents (and that is all it is probably worth):

My wife is an Etsy seller and from my personal experience, through her and what I’ve witnessed, the “community” aspect that has been mentioned above is very accurate IMHO. These are crafters, artisans, DIY’ers…a lot of these products are made by hand, and take a lot of time. As someone mentioned, scalability isn’t really possible (not to any large extent) due to the inherent nature of who these folks are and how they operate.

The products they sell are usually sold for much less than they are worth (I’m defining worth here as, materials + labor with labor being min wage/hr or slightly above). But many of these folks don’t care about that, they do it because they love doing it and sharing it with the world, and if they make a few bucks as well, great, they can buy more raw material, or a new cabinet to hold their yarn, clay,etc).

Many of the people that go there, appreciate the handmade aspect…many are fellow crafters, some with shops on Etsy, some that just doodle on the side but they understand the work that goes into these (rinky dink as I USED to call them) items and so they appreciate them and understand their worth. These people support each other, complete strangers build bonds and have respect for each other because they understand the effort and the labor of love that is involved.

Then you have the folks that shop there because you can’t find the stuff anywhere else…there is quite a bit of uniqueness on Etsy. And unless it is something that takes off and everyone wants one, you won’t find a firm overseas start making them en masse and selling on Amazon.

In any case, bottom line, it’s a community that is devoted and unique. Personally, I still don’t get it but I don’t need to, I’m not one of them, I just deal with the collateral damage through the Mrs. :stuck_out_tongue:

13Bravo
U.S.H.A.

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I think of Esty as an incubator of ideas for personalized, artisan products. Of the 1000’s that make items for hobby, a few will invest in their process, get additional equipment and scale. It is at that point when they have the conundrum of continuing to use Esty or to move to Amazon or their own web presence (shopify, etc.)

How many of these will leave the platform at that point of scale and how many will stay?

I don’t know that Esty is going to capture those dollars after that point. For an investor, it’s like having every home run you find get purchased by another, more efficient platform.

Anti scale means volume is dependent on incredible multiples of “makers”. To get scale, they need exponential “makers” or they need a significant number of successful makers to stay after they reach inflection points.

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If I were to try to guess what the market is thinking, I would guess it simply just sees the growth as temporary.

Have often wondered, “Who is this market (aka Mr/Ms Market)?”, who seems
to sit around thinking about himself/herself all the time, doing
an infinite number of calculations in x-dimensional space whilst the rest
of us stand aside and observe in awe such an extended stretch of navel
contemplation.

What is the market thinking? Some deep thoughts? Or is it no more than
a series of quant algorithms that are executed to take advantage of momentary
imbalances? Leaving some to make actual investing decisions based upon
the underlying trends, short-medium-long term, depending upon one’s investment
focus.

vez

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How many of these will leave the platform at that point of scale and how many will stay?

Weren’t people saying the same stuff about Shopify a year or two ago?

Anti scale means volume is dependent on incredible multiples of “makers”. To get scale, they need exponential “makers” or they need a significant number of successful makers to stay after they reach inflection points.

I think that having incredible numbers of makers is possible and you can build a business on it. I will share my experience as being a Zumba instructor and the international Zumba instructor community. Zumba Fitness is a dance-based fitness craze that has been going strong for more than 10 years. Zumba fitness has rocked the world by being inclusive about who they “let” become an instructor, and the format is so popular and so welcoming that hundreds of thousands of instructors internationally have trained for the format and joined the $30/month subscription network. Add to that supplemental trainings, clothing, additional monthly offers of bonus music, etc. and then events like conventions, and it starts to add up. People love to be creative, you could even say that humans are made to be creative, and Etsy supports and helps people share and grow their creative, entrepreneurial ideas. Among Zumba instructors, some of them are like supermodel superstars (and Zumba gives them more opportunities to be featured) and some are regular people who love to dance and set up shop in their town. My own journey with Zumba was from being an enthusiastic student, to instuctor, to instructor with multiple specialties, to running a small business (I’ll call it a “jobby”, job+hobby) that was a little side hustle that was lots of fun, and it was keeping me healthy. Eventually, after 10 YEARS, I have moved on to to some other things that interest me so I only sub classes now and then, but I am still connected to the instructor network and paying $360/year to be connected to something I love and enjoy and get the instructor perks. When my life changes again and I’m an empty-nester, I will likely go back to it and look forward to that.

I see no issue with Etsy getting and maintaining incredible multiples of makers. Just look at the vast categories on Etsy. I started listening to their August 12 meeting at the Canacord Genuity Annual Growth conference (not finished listening yet) but they talk about the incredible growth of new markets, new products. They’ve sold $500 million in masks in 4 months. Artisan breads are a new thing that have emerged through the pandemic. Yard signs for birthdays and special events have been going strong. I heard, “Etsy is there to support almost every purchase occasion.” I believe that is true.

Regarding Amazon. Etsy and Amazon will not compete head to head. Maybe for things like the craft supplies, but for the artisan stuff – it’s not going to happen. Amazon is the place where you go for your electronics and paper towels. Etsy is the place where you go to connect with creative makers. Commodity business vs. creative business. I think that Etsy can and has differentiated itself successfully vs. Amazon.

Karen

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Today I decided to look for throw pillows online. Somewhere online, I read that ETSY is a great place to look at throw pillows.

Indeed it is!

All the colors, all the fabrics, all the styles.

Etsy is your 24/7 craft fair. I think that craft fairs will mostly, die. Particularly with this pandemic business. That is too bad because our local Rotary club holds a nice craft fair at the high school and our Boy and Girl scouts help there twice a year, at Christmas and Easter.

But for makers, it’s 24/7 access and it can sustain their making year-round. I have some friends that make jewelry and they love to make, but if they don’t sell, they can’t keep making. I can see this as an addictive thing, just as the exercise stuff was addictive for me.

Back to the pillows – if I want a coral pillow, a turquoise pillow, an ikat pillow, a mudcloth pillow, a linen, suede, or leather pillow, etc. etc. etc. to infinity, Etsy is a pretty good place to search for it.

In fact, listening to the Canacord Genuity talk, it sounds like Etsy is going to put more dollars into helping put associated products together. Perhaps this will help me more easily pick out throw pillows that go together.
If this is right, and ETSY can help me put together my throw pillows with my handmade accessories and artwork and vintage finds, this is sounding like a very appealing shopping site.

I have not picked out pillows yet (or really, pillow covers, you can buy the cover from the artisan and the insert from another supplier of your choice), but I certainly have a market place full of pillows and I don’t have to go to Target or Restoration Hardware or TJ Maxx or anything!

And Etsy is not full of made-in-China stuff like Amazon is. (I don’t knock China too bad, but sometimes Amazon is crazy frustrating with all of the off-brand items.)

Etsy is interesting. I am not sure that I will be an investor, but it is a fun company to take a look at.

Karen

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Bear,

I think the difference between ETSY and AMZN is that Etsy is going to offer a somewhat curated experience. If Etsy is limiting their categories and focusing on artisans, then they are also saying what they are NOT, and that is an important piece of branding and identity. We are this – we are not that. Etsy is NOT going to be a bunch of cheap, commodified crap (like Amazon sometimes is). That’s branding, that’s good.

I have heard that some mass-produced things are “sneaking in” to Etsy. It will be interesting to see how they police this, my guess is, very lightly.

There is a lot of things that fall under Etsy’s parameters. They have 3.1 million sellers and 60.3 million buyers…

Karen