Summary
- Etsy had an impressive second quarter driven by the recent COVID-19 pandemic, posting record revenue and profits.
- The company is in a healthy financial position and should be able to keep its momentum rolling.
- The stock is not cheap, but it appears to be fairly valued according to a reasonably conservative DCF.
Overview And Recent Updates
Etsy Inc. (ETSY) is already up almost up 126% over the last year, and it almost quadrupled from its March low of around $30. The stock reached an all-time high of $135.52 before pulling back to the current $123.69 a share. Is it cheap? No. Is its price reasonable? Absolutely. Buying it at 13.0x LTM EV/Revenue still offers a great opportunity for long-term, growth-oriented investors.
Etsy's platform connects sellers (small businesses and individuals) with buyers. The company specializes in handcrafted vintage items, and it recently received extra attention thanks to the COVID-19 pandemic, with crafters responding to the surge in demand for face masks by selling handmade ones through Etsy's marketplace. As of September 2020, Etsy was the 4th largest e-commerce platform with an estimated monthly traffic of 222.5 million visits, only behind Walmart (WMT), eBay (EBAY) and Amazon (AMZN).
Etsy charges fees for listing, completing transactions and processing payments, and even without considering the boost coming from the pandemic, the company has shown solid growth. In 2019, Etsy drew 2.7 million sellers and 46.6 million buyers, generating $5 billion in gross sales. This compares with 2.1 million sellers and 39.4 million buyers in 2018, generating $3.9bn in gross sales. Today, the platform connects more people than ever:
| Metric | Q2 2017 | Q2 2018 | Q2 2019 | Q2 2020 |
| Active buyers | 30.6 million | 35.8 million | 42.7 million | 60.3 million |
| Active sellers | 1.8 million | 2.0 million | 2.3 million | 3.1 million |
| Gross sales | $748 million | $902 million | $1.1 billion | $2.7 billion |
Source: Etsy quarterly reports
Active buyers and sellers include anyone who has made at least one purchase/sale within the last 12 months. Etsy had an impressive run so far: the company doubled its active buyers count since Q2 2017, while active sellers grew more than 70% in the same period. Etsy has achieved these results by attracting more loyal buyers and bringing more value to sellers. Out of the total active buyers, repeat buyers (buyers who have made purchases on two or more days in the last 12 months) reached 26 million in Q2 2020, or a 51% YoY. Habitual buyers who have made six or more purchases on different days increased to 4 million, +64% YoY. Active buyers spent 5.9% more in Q2 2020 versus the prior year, with the average active seller achieving 15% more in gross sales. Clearly, this is a picture of a business model that is working.
Thanks to its amazing top line performance, Etsy reached a record net income of $96 million and operating cash flow of $250 million in Q2 2020. It is a cash-generating machine, and all this new cash pouring into the business, together with the $1 billion of cash & equivalents already on the company's balance sheet, will give management extra flexibility. Undoubtedly, results were heavily influenced by the COVID-19 pandemic, with $346 million sales generated by coronavirus masks (sold by more than 100,000 sellers). However, three of Etsy's six top product categories still saw triple-digit YoY gains in Q2 2020: homewares & home furnishing +128%, craft supplies +138% and beauty & personal care items +187%. Overall, non-mask sales increased 93% YoY, vs. +137% including face masks, while the slower product category (apparel) still grew at an impressive 59%.
