Company Reports

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target non-commoditized inventories, generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for roughly 90% of consolidated gross merchandise volume, or GMV.

After a few quarters of commentary regarding gross merchandise sales, or GMS, sensitivity to broader consumption spending trends, it's become increasingly clear to us that wide-moat Etsy's exposure to systematic factors is higher than we'd initially contemplated. Its largest categories—home and living, jewelry and accessories, apparel, and craft supplies—are inherently discretionary, and with the past few years as a proof point (with GMS falling 5% on a three-year stacked basis), the firm appears to be quite beholden to the systematic risks that are depressing consumer spending more broadly. As such, we plan to raise our cost of equity for Etsy to 11% from 9% (as we did with narrow-moat Chewy last quarter), resulting in a valuation haircut of about 30%. All else equal, we would have lowered our $140 fair value estimate by a low-single-digit percentage, with tepid guidance and our renewed e-commerce forecast—which calls for slowing growth through 2024-25 before a return to nearly 10% annual growth in 2026-28—suggesting that pressure is likely to continue longer than we'd originally penciled in. Shares still trade at an attractive discount, particularly after a 12%-13% decline in aftermarket trading.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target non-commoditized inventories, generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for roughly 90% of consolidated gross merchandise volume, or GMV.

We remain constructive on wide-moat Etsy's long-term prospects and believe that the firm's operational initiatives position it well to emerge stronger from this period of macroeconomic turbulence. Nevertheless, CEO Josh Silverman explained it well during management's call with investors, conceding that almost everyone is losing share to Amazon, Walmart, Shein, and Temu in the e-commerce segment. Sluggish home and living sales (35% of gross merchandise volume), rising marketing costs amid a torrent of irrational spending by Asian marketplace competitors, and a clear preference for deep discounting in a challenging environment continue to depress Etsy's core operating metrics and investors. As we digest another quarterly GMV decline—down 0.7% annually—and guidance for a similarly tepid first-quarter 2024, we expect to lower our $145 fair value estimate by a mid-single-digit percentage. Shares continue to look very cheap, particularly after a similar stock price decline following the release for fourth-quarter 2023.

Wide-moat Etsy announced the appointment of Marc Steinberg to its board of directors after activist investor Elliott Management acquired a sizable (13%) stake in the company. We don't expect to alter our $145 fair value estimate nor our Standard Morningstar Capital Allocation Rating on the news, as we see little disconnect between the firm's current strategy and Elliott's proposed emphasis on improving the customer experience and accelerating growth. As we see it, efforts to cull counterfeit listings and the firm's ongoing platform investments are designed to address those specific pillars directly.

Wide-moat Etsy announced sweeping layoffs in an 8-K filing on Dec. 13. It expects to part ways with about 11% of its global workforce, or 225 employees. The measure comes after two years of stagnant gross merchandise volume growth that saw the craft marketplace grapple with lofty inflation, a return to brick-and-mortar shopping, and a mix shift toward services spending. While headcount reductions are painful, we see the move as measured, following a few quarters of nearly zero headcount growth. We expect the company to emerge leaner as consumer spending begins to recover in the second half of 2024. We don't expect any material change to our $145 fair value estimate. The shares appear deeply undervalued, particularly after falling 5%-6% on the news.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for roughly 90% of consolidated gross merchandise volume, or GMV.

We believe wide-moat Etsy offers compelling value for investors despite a brutal 2023, which has seen its share price fall by a striking 45%. While we're sympathetic to the market's concerns regarding the craft marketplace's growth prospects and potential operating leverage, we continue to view its reaction as myopic. We continue to foresee a route to double-digit gross merchandise sales, or GMS, growth and the margin leverage that begets as soon as 2025. With the firm's $3.04 billion in GMS, $636 million in revenue, and $0.64 in diluted EPS all topping our quarterly estimates, we expect little change to our $145 intrinsic valuation despite worse-than-expected fourth-quarter guidance (low-single-digit GMS decline and a 2-percentage-point sequential fall in adjusted EBITDA margin at the midpoint).

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for roughly 90% of consolidated gross merchandise volume (GMV).

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for roughly 90% of consolidated gross merchandise volume (GMV).

Wide-moat Etsy reported tough quarterly results, and we expect to trim our $162 fair value estimate by a high-single-digit percentage as we contemplate near-term margin deleverage. Our reaction is directionally consistent with the market, which sent shares swooning 6% in aftermarket trading as the firm released lukewarm guidance (0.7% gross merchandise volume growth at the midpoint and decelerating sales growth on a linked-quarter basis). Nevertheless, we remain ready buyers of the name, and identify 1) continued growth in spending among new buyers on the platform; 2) improvements in the firm's curation efforts; and 3) the rollout of a pricing tool, as important developments for long-term investors and underappreciated growth levers. Shares trade at about a 40% discount to our intrinsic valuation, and continue to look attractive for long-term investors. Driving our valuation change, slowing near-term sales will likely result in slower margin recapture, leading us to trim our 2023 and 2024 operating margin estimates to 12.4% and 14.6%, respectively, from 14.2% and 16.4% prior.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties—Etsy, Reverb, Depop, and Elo7—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for just shy of 90% of consolidated gross merchandise volume (GMV).

Our confidence on wide-moat Etsy's long-term prospects remains largely unchanged despite mixed first-quarter earnings, but the firm's sensitivity to a very discretionary category mix—home decor, apparel, jewelry, gifts, toys and games, and crafts—suggests that an inflection in gross merchandise sales growth is likely to be macro-driven rather than company-specific. More concretely, we expect to lower our five-year sales and operating income cumulative annual growth rates to 16% and 27% from 18% and 30%, respectively, with pressure on consumer discretionary income looking set to extend a demand recovery well into 2024—consistent with Morningstar's department forecast for just 1.4% growth in real U.S. consumption spending in that year. On balance, we anticipate lowering our $167 fair value estimate by a low-single-digit percentage, leaving shares trading at a substantial discount to our intrinsic valuation.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties—Etsy, Reverb, Depop, and Elo7—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for just shy of 90% of consolidated gross merchandise volume (GMV).

It would be hard to identify a marketplace with a heavier discretionary skew than Etsy, which makes the firm's sequential acceleration in core marketplace platform sales growth relative to before the pandemic (to 145% in the fourth quarter from 134% in the third) impressive. The craft marketplace isn't through the woods yet, with sales slowing sharply in February as macroeconomic pressures remain pronounced. However, we remain confident in our long-term forecast for nearly $45 billion in 2032 gross merchandise volume and low 30s adjusted EBITDA margin for the marketplace operator. After digesting fourth-quarter results, we don't expect to change our $170 fair value estimate. Our forecast for $3.04 in diluted EPS in 2023 is also intact.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties—Etsy, Reverb, Depop, and Elo7—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite.

Wide-moat Etsy posted resilient third-quarter results, with $594 million in sales and $3.0 billion in gross merchandise sales edging our $567 and $2.9 billion forecasts. Results were particularly impressive when juxtaposed against a worsening macroeconomic backdrop and acute pressure on e-commerce competitors, with the online channel categorically skewing toward more discretionary products like home decor, apparel, and crafts, where consumers typically first trim spending. More concretely, the core Etsy marketplace is 2.3 times larger than the comparable period in 2019, representing only a modest slowdown relative to second-quarter levels (2.4 times), which suggests to us that pressures from reopening trends and stimulus have largely abated. By our estimates, this figure handily outstrips broader U.S. e-commerce (mid-80's) and publicly traded e-commerce competitors (eBay at 2.5% and Amazon around 40%), indicating that the artisanal marketplace remains on much firmer competitive footing than the market gives it credit for. Nevertheless, we expect to lower our $180 fair value estimate by a high-single-digit percentage in light of our expectations for slower growth in 2023 and 2024, corroborated by fourth-quarter guidance below our ex ante forecasts—with rising costs of borrowing and persistent inflation likely to curtail consumption spending over the next four to six quarters, in our view.

Wide-moat Etsy announced a C-suite shakeup on Oct. 27, with long-time employee Rachana Kumar set to replace Mike Fisher as the firm's chief technology officer. Kumar is a consummate internal hire, having served with Etsy in a variety of roles (most recently as VP of Engineering) since 2014, and we don't expect the move to correspond with any marked shift in strategy. Consequently, we neither expect to move our $180 fair value estimate nor revisit our Standard capital allocation rating on the news. With find shares attractive, trading at a sharp discount (roughly 45%) to our intrinsic valuation.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties—Etsy, Reverb, Depop, and Elo7—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s four marketplace properties—Etsy, Reverb, Depop, and Elo7—all target non-commoditized inventories (artisanal crafts, used musical instruments, and vintage clothing resale), generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite.