Etsy was a Pandemic Darling. How it Can Keep the Magic Going

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Etsy was a Pandemic Darling. How it Can Keep the Magic Going
Credit: © Reuters.

By Christiana Sciaudone and Liz Moyer -- It’s hard to feel special when someone hands you another generic set of tropical-scented moisturizers. That’s Etsy’s staying power.

The e-commerce purveyor of unique and handcrafted items makes people aspire for more than just another Bath & Body Works gift basket picked up without a second thought -- who needs a new variation on shower gel?

But for investors, there might not be much more room for gains after a stunning rise last year.’s Christiana Sciaudone explains why Etsy is still a buy, while Liz Moyer takes the bear case.

The Bull Case

The numbers speak for themselves.

Etsy Inc (NASDAQ: ETSY )’s gross merchandise sales for the third quarter rose 119% from a year earlier; revenue rose 128%; and profit was up 520%.

For comparison, take eBay Inc (NASDAQ: EBAY ) and Nordstrom Inc (NYSE: JWN ), examples of new and old school rivals.

eBay reported third quarter gross merchandise volume up 22% with sales ahead 25% and profit rising 27% from a year earlier. Nordstrom, meanwhile, saw revenue drop 16% in the third quarter, and profit fall 58%. Not so swell.

The strong results are “evidence of our focused execution, engagement with our buyers and sellers, and our strong brand, underpinned by the unique inventory in our marketplace,” said Chief Executive Officer Josh Silverman in a statement in October, when the stock got a slew of price target increases (it got a bunch more this month, post-holidays).

“Consumer shopping habits have been greatly influenced by the events of 2020, and Etsy truly stands for something different. We’ve been able to sustain growth by driving retention and frequency of our existing buyers as well as becoming an important shopping destination for new buyers.”

The key to the future, of course, is growth, and Etsy’s poised for it in spades.

“2020 demonstrates the scalability and value of our marketplace business model,” said Chief Financial Officer Rachel Glaser in the same statement. “We have a very disciplined approach to our investments with a goal to deliver profitable long-term growth.”

Etsy reported about 69 million active buyers in the third quarter. That’s versus eBay’s 183 million, which was founded in 1995, 10 years prior to Etsy. The potential is massive.

Last month, Jefferies (NYSE: JEF ) called Etsy a “primary beneficiary of home nesting,” StreetInsider said. Analyst John Colantuoni reiterated a buy rating on the stock.

“While most e-commerce players are competing to sell the same products, ETSY’s marketplace sells unique and handmade goods. By offering products consumers can’t find elsewhere, ETSY is able to stay relevant even as other e-commerce players like AMZN are making unprecedented investments in logistics and delivery capabilities,” Colantuoni said. “We think ETSY’s competitive moat allows it to operate from a position of strength with sellers, affording them ongoing monetization opportunities without risking material churn.”

He pointed out, too, that Etsy represents a blush of the total market despite strong growth in 2020 -- a signal of so much more to come.

“Total retail spending is $1.7T across all relevant categories in ETSY’s top 6 geographies. While not every purchase occasion is for something unique, at just ~$10B in gross merchandise sales (GMS (NYSE: GMS )) ETSY is still a small fraction of the total market,” Colantuoni said.

Earlier this month, Roth Capital analyst Darren Aftahi reiterated a buy rating and $235 price target on Etsy thanks to traffic data that accelerated from one quarter to the next and in each month of the fourth quarter, suggesting gross merchandise sales remained on par with the 90% bump seen in September and October.

“While mask related sales could aid, we believe the holiday could have a further impact due to ETSY’s much larger buyer base y/y, along with enhanced marketing initiatives,” according to a Jan. 14 note by Roth Capital’s Aftahi, StreetInsider reported. “All said, while topline growth may decelerate on the margin, fundamentals remain strong as does the capture of initial COVID related sales.”

Forget the mass-produced white tea and sage gentle foaming hand wash. Go for something truly distinctive, like a personalized engraved wood ballpoint pen or a drawing of your future soulmate paired with a psychic reading. And buy Etsy.

The Bear Case

Etsy has been quite a hit with the stay-at-home and shop the internet crowd. Its 73% increase in Cyber Monday online customer spending smashed that of Target (NYSE: TGT ) (43%) and Amazon (NASDAQ: AMZN ) (19%), according to data reported by The Wall Street Journal. Enchanting television ads featuring unique gifts and unusual craft items undoubtedly lifted holiday sales in general.

Shares of Etsy are up more than 19% in one month while the S&P 500 is up about 2.6%. Earnings per share are expected to be 57 cents for the fourth quarter, up 136% from the same period in 2019. Revenue is expected to jump 90%.

So what’s the problem? Masks.

According to Forbes, more than $600 million of the $5.3 billion spent on Etsy last summer and fall came from the sale of face masks, or 11%. The strong number was behind the doubling of sales volume on Etsy in the third quarter.

But people aren’t going to be buying face masks forever, and there’s probably a maximum saturation point for how many a household needs to have on hand. In addition, the big shopping season is behind us, leaving less of an excuse to scroll online for unique gift items.

Simply put, Etsy’s had a remarkable run, but the stunning growth during pandemic times could be “as good as it gets,” according to Morgan Stanley (NYSE: MS ), which recently reiterated a sell-equivalent on the stock and put a $93 price target on it, which is far below the $212 where it currently trades.

Based on analyst forecasts, growth is expected to slow this year. The EPS estimate for year-end 2021 per share profit is $2.17, which is just 2% higher than the year-end consensus for 2020.

In fact, many of the current Street price targets are below the current trading price, despite several analysts being optimistic on the near term.

Another contrarian is Stifel’s Scott Devitt, who last month downgraded it to hold and a price target of $170, saying the stock trades at 12 times his 2021 revenue estimate.

“We believe the pandemic has generated significant awareness for the platform pulling forward several years of buyer acquisition,” Devitt wrote.

Potential challenges this year for Etsy: The reopening of business and return to life as semi-normal (though to be fair, masks will continue to be worn). That all means people will return to malls and stores and order less stuff online, if only for a break and the chance to stretch their legs and leave the house.

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