Can Etsy Stock Hold Its Own Post Covid?
Back in mid-July, when Etsy stock (NASDAQ: ETSY) was trading around levels of about $100 per share, we discussed how Etsy was carving out a niche for itself in the e-commerce space and outlined how the stock could rise by about 3x over the next few years. (see our article below) Turns out, the stock has already soared by 80% since then, driven by a couple of factors. Firstly, the company has continued the robust adoption of its marketplace through Covid-19, with active sellers growing 42% year-over-year as of Q3 2020, active buyers up 55%, and gross merchandise sales rising 119%. Etsy’s strong execution has meant that its EPS is also on track to grow by almost 3x this year. Investor interest in the high growth Internet space has also remained high, helping the stock.
That said, could the stock – which is now up 4x year to date and trades at over 90x projected 2020 earnings – be poised for a correction? After all, highly effective Covid-19 vaccines are being rolled out, potentially marking the beginning of the end of the pandemic and people could start venturing back to brick and mortar stores as things get back to normal. Although Etsy’s growth will no doubt slow over 2021, we think the company should still hold its own even after the pandemic. Etsy focuses on unique products such as vintage items, craft supplies, and handmade items that are unlikely to be available locally. Moreover, the company focuses on human connections between buyers and sellers – who are typically one-person businesses – and this could also help it to differentiate itself from other online marketplaces. While the Covid related surge will be a one-off event, the company should be able to convert its new users into regular customers while cementing itself as the go-to platform for unique items, helping to drive long-term growth.
[Updated 7/13/2020] How Etsy Stock Could Grow 3x
Is Etsy stock (NASDAQ: ETSY) pricey, trading at about 140x earnings? Not at all. Especially if you consider the fact that the earnings could be about 4x current levels by 2023. How is that possible?
Firstly, we believe that Etsy’s revenues can grow by 2.7x to levels of about $2.2 billion in 2023 from about $820 million in 2019 and an estimated $1.2 billion in 2020, representing a growth rate of almost 38% per year (for context, annual growth was about 31% over the last three years). Etsy has executed well in carving out a niche for itself in the e-commerce space, focusing on handmade products, vintage items, and craft supplies, fending off competition from the likes of Amazon AMZN Handmade marketplace. While the company has grown its gross merchandise sales (GMS) at a CAGR of 21% since 2016 to $5 billion in 2019, it still remains small in context to its addressable market of $250 billion online for relevant categories it sells and over $1.7 trillion, including the offline space.  With Covid-19 expected to accelerate the shift online, Etsy’s growth rate should only rise. For perspective, Etsy indicated the GMS rose by 79% year-over-year in April 2020, even after excluding mask sales. Etsy’s advertising sales are also soaring, with its Services business (about 25% of total revenue), which includes ad sales, more than doubling between 2017 and 2019.
Did you know Etsy stock is up 5x since late 2017? See our analysis How Did Etsy Stock Grow Over 5x Since 2017? for the underlying numbers behind the surge.
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Combine revenue growth with the fact that Etsy’s Net Margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues) are on an improving trajectory – they grew from roughly -8% in 2016 to about 12% in 2019. Etsy’s larger e-commerce platform peers such as eBay EBAY have operating margins that were roughly double Etsy’s as of 2019. Considering this, it’s reasonable to assume that Etsy’s margins could at least improve 1.5x to about 18% by 2023. Why is this possible? Etsy’s key fixed costs of Product development and Marketing and Administration are likely to fall in relation to its revenue growth, while variable costs – which primarily include credit card payment-related costs and cloud hosting costs could also be better negotiated as the company gets larger. So is 4x growth in earnings possible in the next five years? Yes. This looks very reasonable when you combine 2.7x revenue growth with the 1.5x growth that’s possible in Etsy’s margins.
Now if earnings grow 4x, the P/E multiple will shrink to 1/4th its current level, assuming the stock price stays the same. But that’s exactly what Etsy’s investors are betting will not happen! If earnings expand fourfold over the next few years, instead of the P/E shrinking from around 140x now to about 35x, a scenario where the P/E metric falls more modestly to about 100x looks more likely. For context, the broader online retail sector traded at a forward multiple of about 86x, while e-commerce bellwether Amazon trades at over 150x. One might assume that Etsy will trade closer to these levels. This would make a roughly 3x growth in Etsy’s stock price a real possibility in the coming years.
Interested in mega-cap tech stocks? Should you pick Amazon over Microsoft? Find out in our analysis Amazon vs. Microsoft: Does the price movement makes sense. Separately, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.
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