Is Etsy Stock a Purchase?

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E-commerce platform Etsy (NASDAQ: ETSY) has built something special in the retail industry. Her website, which focuses on selling handmade or vintage items and craft supplies, took that feeling of stumbling across that unique store you found on vacation and blew it up to big. scale, and it attracts buyers and sellers like a magnet.

The company’s shares rose sharply in 2020, as growth exploded after the start of the COVID-19 pandemic. But there are three reasons why stocks have more room for improvement.

1. Scope of products drives growth

Etsy’s revenue climbed 137% year-on-year in the last quarter. Growth is likely to be moderate as more stores return to normal operations, but even before the pandemic began, the company was increasing revenue by more than 30%.

Image source: Getty Images.

Etsy’s platform is built around research and discovery technology, which is a key strategy to facilitate navigation in the market. There were 65 million items listed on the site in 2019, and Etsy ended the second quarter with 3.1 million active sellers, a 35% increase year-over-year.

As more sellers gravitate to the platform and the number of listings increases, Etsy becomes like a scavenger hunt for buyers. But it’s also a place where buyers go to purchase specific items. Etsy sellers sold face masks for $ 346 million in the second quarter. That’s over 10% of the company’s total gross merchandise sales.

Excluding face masks, sales increased another 93% in the last quarter. The top-selling categories were home furnishings, jewelry, craft supplies, and clothing. The slowest growing category was clothing, which nonetheless saw sales increase 59% year over year.

These are major retail categories that Etsy is starting to penetrate. There aren’t many retail stores that are increasing their sales at these rates. As CEO Josh Silverman said on the second quarter conference call, “Etsy is growing faster than most and already from a very large scale position.”

2. Buyers flock to Etsy

One of the reasons Etsy works so well is because of one simple thing – it lacks larger competitors in e-commerce. Some Etsy sellers will send a handwritten note with the item. This is not uncommon when buying from a small store owner, and this experience is in keeping with the company’s mission to keep commerce human.

The personal touch and the ability to shop from major retail categories helps Etsy create a strong brand that sets it apart from the garage sale feel of eBay (NASDAQ: EBAY). Etsy has invested in machine learning to make its website easier to navigate, and the company’s growth in active buyers shows it is working.

Active buyers stood at 60 million at the end of the second quarter, up 41% from the previous year quarter. The telltale metric is that of repeat buyers, who grew faster to 51%, reaching 26 million.

A growing buyer base is attracting more sellers, and Etsy is investing in growing its seller base to help them grow their business. For example, the company provides buyers with services such as advertising and free shipping. Service revenues represent about a quarter of the business and have increased in proportion to gross merchandise sales.

3. Assessment

The most important reason the stock is always a buy is because Etsy is very profitable and stocks are trading at an attractive valuation relative to growth.

Free cash flow has totaled $ 366 million over the past four quarters. This is a high free cash flow margin of 32.5% compared to sales. Although this growth stocks has climbed 169% year-to-date, it is only trading 41 times free cash flow, which looks attractive even compared to Etsy’s level of growth before COVID-19.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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