Few businesses benefited more from the Covid lockdowns than Etsy (NASDAQ:ETSY). Indeed, Etsy stock increased many times after a brief decline. With the economy reopening, growth slowed, and shares mostly erased their gains. We think that shares have overshot to the downside just as much as they have to the upside. They now seem to be selling at a favorable price, and we think there is still space for the company to expand.
As we’ll see, what appears to be happening is that the business is adjusting to its new reality, looking for ways to rekindle growth, and reverting to trend growth after a surprisingly high growth period.
Etsy Keeps Gaining Market Share
Looking at the revenue trend makes this plain. Where the hyper-growth pandemic era begins and ends can be determined with ease. What matters is that revenue did not fall when this rapid expansion ended; instead, it has continued to rise more slowly. Due to the company’s efforts to raise its take-rate, revenue is increasing faster than the Etsy ecosystem. It has done so by implementing programs like Etsy Ads and raising prices. Even if some of these changes, like raising fees, did not sit well with many sellers, the company is at least using the money to launch marketing campaigns that are aimed at attracting new users to the site, and the strategy appears to be succeeding.
Etsy must maintain a proper balance between customers and sellers because it is a two-sided marketplace to give everyone the greatest experience.
The enormous market size for which Etsy is fighting and the fact that it keeps increasing its share are two reasons why we are so confident in the length of its growth runway. Keeping in mind that these are worldwide marketplaces and that Etsy is expanding swiftly both domestically and globally, Etsy estimates that its market share of its total addressable market (TAM) is only 2.6%.
Why should we think the business can keep expanding its market share? Etsy continues to add new customers at a very healthy rate that is considerably higher than the pre-Covid rate, which is the greatest proof we’ve seen the company provide. Even though the increase of new customers has slowed recently, it is still significantly higher than the pre-Covid pace. The business has also responded to customers faster than before Covid. This is strong proof that Etsy changed to become a more relevant business and that it is not letting its benefits from the period disappear.
Cohort data is also quite encouraging, with new consumers who have joined more recently lasting longer than before. This indicates that Etsy is becoming a more relevant platform, where customers frequent it more frequently and include it into their routines for buying, as opposed to the past, when it was more of an occasion for making a single purchase.
Etsy Is Consistently Profitable
When we concentrate on more recent results, we also discover causes for optimism. Data from SimilarWeb shows that Etsy visits have been rising dramatically, with 448 million visits in August, up from 411 million in June.
Comparing Etsy to other e-commerce and technology companies, one aspect we admire is its consistent profitability. It has a high operating margin and gross margin. Although operating leverage has recently reversed due to the company’s increased expansion initiatives, it is still evident in the operating margin improvement.
Etsy’s balance sheet is respectable, but we do wish it had a little less debt. Debt is $2.2 billion, and cash and short-term investments are around $1 billion.
The company recently reached an EV/Revenues multiple that was comparable to what the company experienced during the initial Covid crash when shares were trading at roughly $80.00. That was probably a hint that the price of the shares had fallen too low. Although they have since partially recovered, we still think they are pretty attractive at the moment, given that their current EV/Revenues ratio is only 6.2x, which is far lower than their historical average of 7.8x.
Etsy Stock Valuation
Etsy stock has rarely been as inexpensive when comparing the price-to-earnings ratio. Etsy stock’s current p/e is not too far off the all-time low it attained of 22x and is practically half the historical norm. We consider the current forward p/e of 28x favorable for a high-quality growth platform business.
Investing in Etsy stock carries risks, especially given that Etsy stock competes with other well-funded companies like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY). Thus far, the company has demonstrated that it can compete and expand its market share. In addition, although the company’s debt is currently very manageable, we are concerned that it could become a problem in a severe downturn.
Etsy stock is trading at highly attractive valuation multiples compared to its historical averages. We think investors are becoming overly gloomy about the company’s future growth since they were overly enthusiastic about the unusual growth brought on by the pandemic. The company has demonstrated that its newest client cohorts are more desirable than earlier generations, and it is both adding considerable numbers of new customers and improving its ability to retain existing ones. Because of the size and scope of the addressable market and other factors, we think the business can grow profitably in the future.
Featured Image- Megapixl @Michaelvi