Catchy Mission Impossible-themed commercials for the holidays aren’t the only reason to like Etsy ETSY. This wide-moat stock is deeply undervalued, trading at just over half of what we think it’s worth. Etsy’s unique inventory has allowed it to carve out an interesting competitive niche. Morningstar chief U.S. market strategist Dave Sekera thinks Etsy is a stock that’s well positioned for 2023 holiday sales; he also includes Etsy as one of his four top stocks to buy on sale this week. The stock tops our list of 10 undervalued wide-moat stocks this quarter, too.
We view Etsy’s competitive strategy for its marketplace properties—Etsy, Reverb, and Depop—as sound. The company targets noncommoditized inventory like artisanal crafts, used musical instruments, and vintage clothing. It generates commissions on third-party peer-to-peer sales and strives to create a “treasure hunt” experience around unique, customizable products. Etsy’s consolidated active buyer base swelled to 95 million at the end of 2022, roughly level with 2021 figures and more than double the prepandemic number. As the company leans into brand marketing, invests in platform search functionality and filtering, and reduces purchase friction with its buyer protection program and better platform policing, we could see mid-single-digit growth in average annual spending per buyer over the next decade.
Key Morningstar Metrics for Etsy
- Fair Value Estimate: $145
- Star Rating: 5 Stars
- Economic Moat Rating: Wide
- Uncertainty Rating: Very High
Economic Moat Rating
In our view, Etsy is one of the few companies poised to be a long-term winner in e-commerce. It has built a marketplace of nontraditional, unique, customizable, and artisanal inventory, deriving a competitive edge from a network that grows more valuable as additional buyers and sellers join the platform. Etsy’s access to more than 100 million nonstandard products, almost all of which have neither a stock-keeping unit number nor a universal product code, allows the company to develop search algorithms that would effectively be impossible for peers to emulate. While Etsy’s narrow purview limits its long-term total addressable market, it has allowed the company to mobilize a network of some 7 million-8 million largely untapped sellers and 95 million active buyers at year-end 2022, en route to a commanding share of a fragmented craft market. We expect 48% average annual adjusted returns on invested capital through 2032, healthily exceeding our 8.7% weighted average cost of capital estimate.
Fair Value Estimate for Etsy Stock
Our fair value estimate is $145 per share. We see a route to double-digit gross merchandise sales growth and accompanying margin leverage as soon as 2025. Etsy retained the lion’s share of pandemic-induced gains in gross merchandise volume, which has grown at a 36% compound annual growth rate over the past four years, healthily outpacing broader U.S. e-commerce. Between 6% growth in gross merchandise volume per buyer and just over 165 million global buyers in 2032, we view $40 billion in gross merchandise volume as an achievable long-term target for Etsy; this implies that volume will almost triple in 10 years. With the Etsy marketplace already operating at a 30% adjusted EBITDA margin and subsidiary marketplaces slowly getting up to speed, we view nearly 20% average annual operating profit growth through 2032 as plausible.
Risk and Uncertainty
The e-commerce industry is intensely competitive, marked by constant innovation, increasingly rapid paths to scale, and low barriers to entry. Players are forced to vie for developer talent, customers, and sellers. International exposure and recent merger and acquisition activity represent substantial risks. With 45%-50% of gross merchandise volume tied to international markets, Etsy remains sensitive to foreign-exchange fluctuations and must navigate differing tax policies and tariffs across geographies. Though the Depop acquisition offers exposure to attractive end markets, it adds integration risk, which could result in restructuring costs or fragmented management attention.
Etsy Bulls Say
- Etsy’s investments in its star seller program, purchase protection, and shipping time estimates should help improve platform trust and may allow the company to move upmarket.
- After more than doubling its 2019 buyer base, Etsy has likely reached a demand tipping point, heightening barriers to success for new entrants.
- The company’s increased reach in international markets and among customers who identify as men should add a long-term leg to its active user growth journey.
Etsy Bears Say
- Without many high-frequency items on its marketplace, Etsy lacks the natural traffic draw that larger e-commerce peers like Amazon command and is more sensitive to cyclical factors.
- Local players may have an advantage in international markets, given their nuanced understanding of those cultures and regulation that often favors homegrown companies.
- Its very discretionary products and the proliferation of drop-shipped, relatively commoditized goods could cause Etsy to struggle to increase average platform spending per user.
This article was compiled by Susan Dziubinski and Sylvia Hauser.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.