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Description
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Foreword
I’ve meant to do a full write-up on ETSY for a while. However, due to the plethora of excellent pieces out there already, this write-up will be more short-form/stock pitch in nature. I recently finished reading “The Smart Money Method” by Stephen Clapham and will follow his stock pitch approach from chapter ten, what he calls “Communicating the Idea” (although not exhaustively, as for instance, one section he suggests to include is one on “sell-side coverage and which analysts are competent” – Not only do I lack full access to all sell-side coverage, it would be inappropriate for someone like me, not even in the industry, to criticize persons who have been in the industry for decades). Finally, my pitch will use some of the resources in Edgar Company Search, as well as some sell-side research and of course directly from Etsy SEC filings.
ETSY is a buy for the following reasons:
Large and expanding TAM
Empowering new generations of entrepreneurs
Secular Growth Trend of E-commerce
Currently, e-commerce constitutes ~18% of all retail sales worldwide Expected to reach ~22% by 2024 and continue trending upward
Network Effects and uniqueness in e-commerce space
Established its brand as the leading marketplace for differentiated items As more buyers and sellers continue using Etsy, it becomes a more attractive marketplace for everyone
5-Year Price Chart 
1) 30% increase in about a week in late February 2019
2) ~21% decline in August
With the stock up already 45% YTD leading up to reported earnings, the muted growth in services revenue (up 16.2% YoY) and gross merchandise sales (up 21.4% YoY) led to some traders taking profits, causing a downturn in the stock2
3) Nearly 50% decline
4) From the Covid bottom in March 2020 to February 2021, Etsy shares rose 600%
A clear winner from the effects of Covid (people being forced to stay home, e-commerce, etc.), Etsy shares went on a volatile tear, increasing by 6x in less than a year
5) 25% decline in April-May 2021
My takeaway from the price chart above is that COVID was clearly a great accelerator for Etsy. It was a direct benefactor of individuals staying home/shopping online, which was reflected in their financial results for 2020 (GMS increasing over 100% from 2019 to 2020). In terms of the stock declining, as the stock is already expensive, trading at an EV/Sales of greater than 10x, shares likely will dip again if there is an earnings miss or there are any other negative surprises not reflected in the share price already. According to Finsheet, these dips in price may represent great buying opportunities.
Investment Thesis
According to Finnhub Stock Api, Etsy will outperform the broader market in the long term due to its unique value proposition and the various tailwinds it enjoys, including massive and expanding TAM, the continued growth of e-commerce, the rise of “side-hustles” and their ability to empower entrepreneurs, and network effects stemming from its first-mover advantage and recognized brand.
TAM
In a 2019 Investor Day presentation and recently presented again in their Q2 2021 investor presentation, Etsy have indicated their total addressable market as over $1.7 trillion for total retail and ~$250 billion of online retail as of 2018. These figures include their 6 core markets (US, UK, France, Germany, Canada and Australia) and do not include India, the newest member of their core geography, nor do they include contributions from Etsy’s recent acquisitions; depop, Reverb, and elo7. Etsy management arrived at these numbers by taking both physical and online sales for all relevant categories in these 6 core markets, then found that approximately 15% or ~$250B of the retail sales happened online3. The real question is how much of this TAM can Etsy realistically expect to capture? In the same 2019 presentation, management stated that through a 2018 study of US consumers, roughly 40% are “expressives”, aka persons who would actually use Etsy to find unique products/items. They then multiplied this 40% by $250B to arrive at an online retail TAM of ~$100B. Assuming that same 40% of “expressives”, and that online retail TAM has increased 10% annually since 2018 (very conservative considering US e-commerce, Etsy’s largest market, grew 15.1% in 2019 and another 44.0% in 20204), and including Etsy’s recent acquisitions and forays into new markets (depop = expansion in apparel, Reverb = expansion into musical instruments, elo7 = expansion in Brazil), a TAM range of $120-150B is realistic.
Empowering New Generation of Woman and Young Entrepreneurs
According to Etsy’s 2019 Global Seller Census, 87% of its sellers identify as women, a stark contrast to the World Banks’ estimate of 35% of firms having women in ownership positions5. Clearly, Etsy provides lower barriers to entry than a traditional brick-and-mortar business, which requires significant capital and know-how to get started. Etsy sellers on the other hand can experiment with entrepreneurship and learn as they go with little financial burden extracted from them. With the majority of items being handmade, crafty, and unique, it is of no surprise to see the vast majority of sellers identifying as women. Also accentuating this trend is the fact that there are simply more women becoming entrepreneurs, with the number of women-owned firms growing at 5-times faster than the national average over a ten-year period. This bodes well for Etsy, whose platform is the first marketplace that 55% of its women sellers sell their goods compared to men at 38%. I expect Etsy’s seller growth to continue to be fueled by woman sellers as a greater proportion of future entrepreneurs are likely to be women and will find Etsy as the natural fit for where to sell their goods either initially or as a secondary source.
Also unique to Etsy is the fact that the median age of Etsy sellers is only 39, with 60% being under the age of 456, while the typical business owner in most countries across the world is above 50 years old. Being an online marketplace, Etsy provides creative entrepreneurs with the ability to easily launch an online business, where traditional barriers to entry are greatly reduced. Etsy sellers are also distributed regionally in their countries of origin, with 28% of sellers reporting being from rural areas, and only 23% from urban. This makes sense, as those sellers within urban areas have greater access to physical markets and trade shows and the density of population works for them whereas those in rural areas have little ability to sell their goods through physical avenues close to home. This trend of engaging younger sellers again bodes well for Etsy as younger sellers are more likely to rely heavily on Etsy, stay on the platform longer, and have greater business runways vs the typical business owner today globally.
E-commerce Growth
As mentioned in the TAM section, the market's forms 10q show that US e-commerce grew 15.1% in 2019 and exploded by 44.0% in 2020 due to the COVID-19 pandemic and our inability to leave our homes. The growth that was anticipated to take years, happened in merely a few months. In terms of global e-commerce, eMarketer forecasts total retail e-commerce sales to increase to over $7T and to represent nearly 25% of total retail sales by 2025. 
Source: eMarketer
Although these figures include all markets, not just Etsy’s core offerings, it demonstrates the clear secular trend and growth of online commerce that at least for the short to medium term shows no signs of slowing down. Finally, Etsy not only reaps the benefits of this trend but historically has outpaced e-commerce growth by as much as 2.5x (as shown in the table below) and has recently topped eMarketer’s list of top 10 US companies ranked by retail e-commerce sales growth in 20217 
Source: Form 10 k
Strong Network Effects
According to Investopedia, the network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. Etsy’s marketplace clearly exhibits strong network effects through its vast differentiated supply of sellers whose oftentimes hand-made items are as unique as they come (2020 survey of Etsy buyers, 88% of buyers agreed that Etsy has items you cannot find anywhere else8). The more sellers Etsy attracts, the more unique items can be found, directly benefiting Etsy’s buyers and attracting more of them. As more buyers start using Etsy, this, in turn, attracts more sellers as the pool of buyers increases and therefore the amount of money spent on the Etsy platform also increases. Being an international platform allowing cross-border transactions, this again greatly expands the pool of both buyers and sellers. Being the first mover to scale to such a size and increasing its brand awareness, Etsy has developed a strong moat for persons seeking unique and differentiated items, one that is unlikely to be encroached upon easily. The best example of a competitor attempting to enter the market is Amazon, which in 2015 launched Amazon Handmade. In the years since it has become clear that Amazon cannot compete with Etsy in this space as Amazon is associated with price sensitivity, speed, and selection vs Etsy’s value proposition of uniqueness and differentiation.
Risks
Competition
Of the several risks offered by Etsy in their annual report, the one deemed to be of most concern by far is that of competition. Competing against the likes of e-commerce giant Amazon and retail giant Wal-Mart has investors worried about Etsy’s future success and rightly so. However, as mentioned in the section on network effects, Etsy has now established itself as the go-to marketplace for unique/differentiated items, while its main competitors offer standardized low-cost product offerings. When taking into consideration the main suite of products offered by Etsy sellers, local craft and flea markets should be considered its true main competitors. Being local and physical in nature, Etsy has little concern of these markets taking substantial business from it. Consumers can easily spend their money at both local markets in their neighbourhoods as well as online and shop for similar goods at online Etsy seller stores globally.
Recent/Future Acquisitions
The other significant risk for Etsy is their ability to integrate their recent acquisitions as well as any future acquisitions they execute. Integrations are costly both in monetary terms and human capital terms. If unexpected problems arise (which they often do), they may strain management’s attention or technological/operational resources, hurting the financial results of Etsy. I will not pretend to be an expert in their recent acquisitions and management’s ability to properly and efficiently integrate them into the business, but I will say that at a high level, Etsy does not appear to have overpaid and each acquisition appears to have strategically expanded Etsy’s reach into new markets that its current business did not properly satisfy. For future acquisitions, there is the possibility that Etsy forays into markets that are more standardized and directly conflict with their band/identity which would have Etsy directly competing against the Amazon’s and Wal-marts of the world as well as hurt their image and value proposition.
Business Overview
Etsy operates a two-sided online marketplace that connects millions of buyers and sellers – both of which produce or seek out unique and niche products vs more traditional items found at your local Wal-Mart or on Amazon. Their mission is to “Keep Commerce Human”, demonstrating their commitment to promote and empower their sellers around the world who are individuals rather than large corporations. As stated in their annual reports, active sellers on the platform are the heart and soul of Etsy. This has led to Etsy being a seller-aligned business model with Etsy making money alongside their sellers. Currently, as of the Q2 2021 reported earnings, Etsy has 5.2 million active sellers and 90.5 million active buyers, which are distributed across nearly every country in the world. Below is a graphic that Etsy provides in their reports, one I found particularly helpful in visualizing Etsy’s value proposition. In short, summarizing Etsy in one sentence, it is the leading global peer-to-peer marketplace for craft, vintage, and artisan goods. 
Source: Etsy form 8k page 75
How Etsy Makes Money
Etsy makes money in two ways, Marketplace Revenue which accounts for roughly 75% of the total, and Services Revenues which accounts for the remaining 25%. Marketplace Revenue (which is entirely paid for by Etsy sellers) includes listing fees, transaction fees, payments platform and offsite ads. Services Revenues includes all the optional value-added services Etsy offers such as Etsy ads, shipping label and protection, as well as some other minor services. A summary of specific dollar amounts and percentages can be found below. 
History
Founded in 2005, the Etsy website was created and launched by iospace, a small company composed of Robert Kalin, Chirs Maguire, and Haim Schoppik. Kalin stepped down as CEO for the first time in 2008, ceding the position to Maria Thomas (Kalin would eventually return to the position in December of 2009, only to remove for good in July 2011). Several long-standing employees left at this time, including fellow founders Maguire and Schoppik. Chad Dickerson, formerly of Yahoo! also joined in 2008 as CTO and later became CEO in place of Kalin in July 2011. During this time, Etsy raised additional funding through several VC funding rounds, the latest being $40m Series Fund in May 2012 (Crunchbase has an additional round in May 2014 at $5.6m but I’m unable to verify this raise elsewhere). Etsy filed for a $100 million IPO in March of 2015 and has appreciated nearly 600% since that time (fun fact: Etsy IPO’d at around ~$27 a share but you could have grabbed shares at the March 2020 pandemic “crash” low of ~$32 – as can be seen from the 5-year chart I shared earlier; the stock went virtually nowhere from time of IPO to early 2020)9.
Management and Compensation
Although all management team members appear competent and share in the success of Etsy, I will focus solely on the CEO and CFO positions. Current CEO Josh Silverman and CFO Rachel Glaser both joined Etsy in 2017. Both held impressive roles before joining Etsy, with Josh previously being the CEO of Skype and President at American Express, and Rachel holding the role of CFO at several companies including MyLife.com, Move Inc., and Leaf Group. Before Josh and Rachel joined Etsy, operating margins never surpassed 5% and revenue growth depleted from ~70% in 2013 down to ~20% in 2017. Josh and Rachel’s impact can be seen in the operating performance immediately, with stock price in Google Sheets increasing by 58% over the last 5 years and revenue increasing back up to 35%+ annually and operating margins doubling to over 10% and most recently in 2020, reaching 25%. The table below shows the disparity clearly. Also, Etsy’s take rate increased over 3% since they joined, from 13.6% in 2017 to 16.8% as of the 2020 annual report, and as of the Q2 2020 report, now rests at 17.5%. 
I find it interesting that, unlike many tech companies whose founders stay on to lead, with skin in the game and whose personality attracts hype and optimism, Etsy has been the most successful without its founders. After viewing the executive compensation structure, it appears the compensation board has found the right mix of incentives to motivate management to think long term. Etsy designed the program to be a simple pay-for-performance structure, which is summarized in the table below. 
Source: 2021 Etsy proxy statement
As you can see, management performance is graded on a weighted average of several key financial metrics including GMS, Revenue, and Adjusted EBITDA margin. With Etsy still being a relatively young company and in its growth phase, I believe GMS/Revenue are fair metrics to evaluate managements performance against. From 13f filings, the EBITDA margin metric also ensures management is somewhat focused on cash flow and profitability vs fueling growth at any cost.
Balance Sheet Analysis
As of June 30th, 2021, Etsy has over $2 billion in cash, and ~$2.7 billion in current assets, which represent over 80% of Etsy’s total assets. It is well-positioned for any potential financial setbacks that could occur while also in a fine position to fuel growth via future acquisitions. Free cash flow as a percentage of revenue increased to over 30% for 2020, while my model (which I will explain more thoroughly in the next section) has free cash flow north of 20% for the entire forecast period, meaning Etsy should be flush with cash from here on out (barring any significant changes to the business). That being said, Etsy will likely not need any future debt or equity financing to fund day-to-day operations, a huge plus for shareholders who do not want to see their positions diluted or the riskiness of the business increase materially via inopportune debt issuance. Etsy’s largest liability is its long-term debt at $2.3 billion with very manageable rates of between 0.3-0.4% for all 2018-2021 Notes10. Total interest expense represents approximately 4% of revenues or less per year historically and should continue to remain at this level or trend down. To sum it up, I see no weaknesses or red flags in Etsy’s balance sheet.
Model and Valuation
Although not the perfect valuation tool in this case, below is a comparables table with various valuation multiples. In my opinion, Etsy does not have a true apples-to-apples comparable in the market, but the below stocks are somewhat comparable and were often found in other comparables tables that I came across. From the subset below and data filed in SEC form 4, Etsy appears to be trading quite expensive, which when considering their stage in their business life cycle (earlier stage and greater growth), makes sense. No great insight to be learned here in my opinion but I thought I’d include it in case anyone was curious and because these sorts of tables are commonplace in most research papers. 
Moving on to the actual model. Here again, I must call out that the model is a recreation of the one made by Abdulla Al-Rezwan aka MBI Deep Dives or known on Twitter as @borrowed_ideas. He did his analysis back in 2019, mine extends actuals to 2020 and then future growth/margin assumptions are my own.
The model is driven by revenues from marketplace and services, which in turn are driven by Gross Merchandise Sales (MGS), which in turn are driven by active sellers (as mentioned earlier, Etsy makes money through sellers using their services or when buyers purchase the sellers’ goods and Etsy takes a cut). All that is to say, growth in active sellers is what moves the needle most. As of June 30th, 2021, in their 10-Q, Etsy has stated their active sellers reached 5.2 million, therefore I thought 5.5 million was an appropriate number for the number of active sellers by year-end 2021. From there, I decreased seller growth modestly down to 4% by the final year of forecasts, 2030. Active buyers are included in the table more as an idea of the kind of buyer growth expected, with the monetization of buyers being possible in the future. 
Below are the assumptions used for Marketplace and Services revenue. Starting with Marketplace, for payments revenue, under share of payments, I continued the clear upward trend increasing share of payments to 95% by end of the forecast period. The same thing with International GMS share, I increased it steadily in keeping with the historical trend (I am curious to see with all of Etsy’s recent acquisitions, and likely future one’s in international markets, how wrong I will be in stating that by 2030, international GMS will still be less than 50%). International and domestic % fees I have kept flat and in line with historicals. In terms of transaction revenue, transaction fees I have climbing slowly up to 7%. Currently, they are at 5% and have already increased from 3.5% in 2017. My thinking here is that over time, sellers will be more entrenched with the platform and find leaving due to a 1% increase over the years as a nuisance, and instead just take the hit on the chin. From other analyses I’ve read, management does believe they have some wiggle room to increase this above 5% over time. Listing fees I have increasing to 4.5% and remaining flat. Finally, for services revenue, I have them at 4.25% and remaining flat for the forecast period. This to me is quite conservative as the growth slows tremendously throughout the forecast period, but when comparing to historical growth of services revenue as a % of GMS, we see that annually it increased by at least 25%. To me, I believe this somewhat offsets any ill-informed optimism I may have in my Transaction Fees reaching 7% by 2030. 
The DCF analysis arrives at a fair market value price per share of ~$245 for Etsy, which is a premium of ~26.5% as of Etsy's closing share price of $193.96 on August 11th, 2021. I used a WACC of ~8% from ValueInvesting.io which I believe is fair after the last year Etsy had and the strength of its balance sheet and FCF generation. Prior DCF analysis’ I’ve looked at had the WACC at 10% or higher, but those are from 2017 or earlier when the visibility of Etsy’s future was less known/riskier. Below is a table of how I got to a WACC of 8%. 
Based on the calculations, Etsy's DCF valuation is around $113.74, equivalent to 55% upside. I would add that the Beta figures I took from previous analysis and did not calculate myself, therefore there may be an argument there that the Beta should be higher (or lower, but probably not). The Low case does not add any size premium or company-specific premium as I believe Etsy being a $20B+ market cap company no longer warrants a size premium, and the company-specific premium is captured in the Beta. This WACC table was used at a previous employer for private valuations, hence the size and company-specific premiums as private companies are smaller and being private, less liquid. The best stock research websites also mention that with a greater proportion of debt, Etsy could bring their WACC down considerably. 
Conclusion
After doing a quick review of page and word count, I now realize this piece is lengthier than my earlier PINS report - so much for keeping it short and sweet. With that being said, I will keep this conclusion short.
Etsy is a great business with awesome intrinsic value that has several key secular trends that will continue to propel its growth well into the future. Today the stock is mostly fairly valued, but being volatile, it should offer many great entry points during periods that it sells off for whatever immaterial reason. I bought shares twice over the last year and now have an average cost of about $180.At such low stock price in Excel, Etsy presents itself as a great investment opportunity. In the short term, I do not plan to add to my position but will follow the stock intently during earnings and perhaps add in the case that I see Etsy looking “cheaper” than usual and see no better opportunities elsewhere. If you are interested in do additional analysis for Etsy, use this guide to learn how to get stock price in Excel and build financial models from there.
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